Congress scrutinizes problems in homebuyer credit

The rush to implement a tax credit for first-time homebuyers opened the program up to potential fraud by people who hadn't bought a home or already owned one, Congress was told Thursday.

J. Russell George, Treasury Inspector General for Tax Administration, questioned the eligibility of some 100,000 claims out of the 1.5 million who have sought to take advantage of the $8,000 tax credit incorporated in the economic stimulus package enacted last February.

He said claimants include those who could possibly be illegal immigrants and that 580 people seeking $4 million from the first-time homebuyer credit were under the age of 18. The youngest taxpayers receiving the credit were 4 years old, his office said.

George and an Internal Revenue Service official testifying before a House Ways and Means Committee subcommittee stressed that many of the questioned claims may eventually be found to be legitimate after further examination.

But the hearing raised a yellow flag as Congress considers whether to extend, or even expand, the popular program that is set to expire at the end of November.

The top Republican on the panel, Rep. Charles Boustany, Jr., of Louisiana, said that while the issue of extending the credit was not the purpose of the hearing, "every time Congress creates a new refundable credit ... the incentive for fraud is magnified."

Linda Stiff, IRS' deputy commissioner for services and enforcement, agreed that "any time that there is an opportunity to receive cash back, it tends to attract people that might have an intent to defraud the government." She said the agency "will vigorously pursue those who filed fraudulent claims."

Rep. John Lewis, D-Ga., chairman of the oversight subcommittee, said he had introduced legislation to improve the IRS' administration of the program, including giving it the authority to look at prior returns to determine eligibility and requiring that taxpayers provide documented proof of a home purchase.

Currently, applicants must fill out a separate IRS form, but do not have to supply documentation.

The tax credit is "a vital part of our economic recovery efforts. We must ensure that we are administering the credit accurately," Lewis said.

George said more than 19,000 people filed 2008 tax returns or amended returns claiming the credit for homes they had not yet purchased. Those claims amounted to $139 million and it was not clear that the IRS planned to go back to verify that those purchases actually took place, he said.

He said his office had identified another $500 million in claims, by some 74,000 taxpayers, where there were indications of prior home ownership.

The homebuyer credit was a key element of the $787 billion stimulus package enacted last February. Under the measure, low- and middle-income first-time homebuyers purchasing a home between Jan. 1 and Nov. 30 of this year could claim a credit of up to $8,000 on their 2008 or 2009 income tax return.

George said the IRS has implemented computer programming to reject claims from people who have not yet purchased a new home. He also acknowledged that the agency has installed filters to catch claimants who had entered information on tax returns indicating they may have owned a home in the three previous years. Those could include deductions for home mortgage interest or real estate taxes.

While the program has widespread support in Congress, there are growing concerns about the costs. The cause, said Sen. Jack Reed, D-R.I., "is a worthy one." But "I hope we can find ways to pay for it."

Critics have also characterized the program as a subsidy for people who would have bought a new home regardless of the tax credit. The National Association of Realtors has estimated that one-fourth of those who have claimed the credit, about 350,000, would not have purchased their homes without the credit.