Audit finds irregularities in home buyers tax credit claims

Even the dead wanted the home buyers tax credit -- $10.1 million of it.

More than 1,300 recorded as deceased in federal records claimed they bought homes afterward, according to an audit of the IRS by the U.S. Treasury Department's inspector general for tax administration. The Internal Revenue Service rejected 528 of these claims but said it will audit the returns of the rest.

Also in the audit, released Sept. 9, 4.1 percent of the filers, or more than 73,119 returns, had wrong purchase dates recorded in the IRS systems -- a key issue because the credit was just an interest-free loan in 2008 until a 2009 new law expanded the program and made the credit free money. Out of those filers, 59,802 returns had no purchase dates or ones that were incorrectly recorded as 2008, which means many of them will get erroneous notices messages saying they must pay off the loan, the report said.

In all, almost 1.8 million taxpayers filed for $12.5 billion in the tax credit last year, concluded Inspector General J. Russell George.

About half, or 950,000 filers, bought their homes in 2008, which means they will have to pay back up to $7,500 in the loaned credit during the next 15 years, the audit said. The credit has been changed several times in the last two years, and the audit and the IRS acknowledged that it's been a big task for the IRS to keep up, leading to mistakes and incomplete monitoring systems, especially in early returns.

The Housing and Economic Recovery Act of 2008 set up the credit as a loan, but when the American Recovery and Reinvestment Act of 2009 was passed, the credit turned into up to $8,000 of free money for first-time home buyers in 2009. Then even later, as the economy weakened, the Worker, Home Ownership and Business Assistance Act of 2009 allowed many current homeowners to take advantage of the credit.

Also, the original closing deadline of midnight Nov. 30, 2009 has been changed twice. Now it's midnight Sept. 30.

In its response to the inspector general, the IRS said it will audit problematic claims, strengthen checks, get back wrongly-issued refunds and use third-party property records to verify purchase information.

But the IRS may face an even bigger challenge.

The law requires the credit to be returned in certain cases, including when the house is sold within three years at a profit, sold to a relative or destroyed, or converted to a business or rental property.

Right now, auditors said, the IRS does not have a system in place to track such changes through the years but is developing a "comprehensive strategy" that will use property records.

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