By CCH News Staff

While the IRS has paid out almost $10 billion in tax benefits to low- and middle-income Americans who claimed the first-time homebuyer tax credit, it also has been scrutinizing individual tax returns for errors and fraudulent claims.

Congress enacted the credit in 2008 to spur the housing market. It extended the credit in 2009. For homes purchased after April 8, 2008, the credit provided a $7,500 loan. Although the credit was refundable, it had to be repaid over a 15-year period. However, for homes purchased in 2009 (by November 30), Congress increased the credit to $8,000 and eliminated the repayment requirement. Thus, qualifying taxpayers with little or no tax liability could receive cash for the credit and not have to pay it back.

Concerns About Errors and Fraud

By September 2009, 1.4 million taxpayers had claimed the credit, for a total of almost $10 billion, according to a recent IRS report. The Treasury Inspector General for Tax Administration (TIGTA) stated that, through May 29, 2009, it had identified more than 70,000 returns, claiming total credits of $489 million, by taxpayers who appeared to be ineligible for the credit. An IRS spokesman confirmed that, as of September 30, 2009, the Service has opened 107,000 civil tax cases involving the credit.

The IRS Criminal Investigation (CI) Division has been scrutinizing tax credit claims through its questionable refund program. TIGTA, in a March 30, 2009, report, determined that CI had referred 273 cases to IRS auditors involving the credit. As of September 30, 2009, the IRS identified 167 criminal schemes involving the credit.

Congressional Action

It is against this backdrop that Congress is considering an extension of the homebuyer credit. House Majority Leader Steny H. Hoyer, a Maryland Democrat, said he favors extending the first-time homebuyer's tax credit for one additional month, through December 31, 2009, for sales contracts entered into, but not yet settled. During that 30-day period, Senator Hoyer said Congress should study the credit to determine its effectiveness as well as its ethical and honest usage. He notes that the real estate market and the home building industry are critical components of the U.S. economy.

The House Ways and Means Oversight Subcommittee will hold a hearing October 22 on the IRS's administration of the credit. In a statement, subcommittee Chairman Representative John Lewis, a Georgia Democrat, said that he was pleased about the number of taxpayer claims for the credit but was concerned about reports of fraudulent schemes. The hearing will consider how the IRS can strike a balance between issuing refunds and protecting federal revenues.

Senate Efforts

A bipartisan effort to pass the homebuyer tax credit extension in the Senate has raised the ire of some Democrats. The effort seeks to amend a bill extending emergency unemployment benefits an additional thirteen weeks. Senate Democrats have twice tried and failed to move the House-approved unemployment benefits bill (HR 3548) by unanimous consent. Both times the attempts were blocked by Republican Georgia Senator Johnny Issakson, who wants to attach his tax credit amendment to the unemployment benefits bill.

Both Senator Issakson and Democratic Senator Christopher J. Dodd of Connecticut have proposed extending the homebuyer credit for an additional six months and expanding eligibility to all homebuyers, not just those purchasing their first home. The Issakson-Dodd proposal would also raise the qualifying annual income cap to $150,000 for individuals and $300,000 for couples. Democrats counter that the unemployment bill should be passed as soon as possible and not bogged down with debate over unrelated amendments. In addition, many balk at the length of the extension, the $16.7 billion cost of the proposal, and expanding the tax break to all homebuyers.

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