Audit Finds IRS Paid $500 Million In Unjustified Home Buyer Credits

It turns out a lot of people taking the first-time homebuyer's tax credit last year didn't qualify for it. The Internal Revenue Service (IRS) says it processed $500 million in wrongly-claimed credits.

Russell George, the U.S. Treasury Department Inspector General for Tax Administration (TIGTA), said investigations revealed about 47,000 taxpayers who claimed the $8,000 tax credit already owned homes.

The measure, approved by Congress in the wake of the housing market collapse, is credited with keeping home sales afloat during the time it was in effect. Sales have fallen since the credit expired.

"The IRS has taken a number of positive steps to strengthen controls and help prevent inappropriate Homebuyer Credits from being issued," the report said. " Primary among these controls was the implementation of filters to identify questionable claims for the Credit before they are processed."

Math authority

The legislation also granted the IRS math error authority to deny Homebuyer Credits if proper documentation was not provided by the taxpayer. However, the implementation of the filters and passage of this legislation occurred after many Homebuyer Credits had already been issued, the report found, including fraudulent and erroneous Credits totaling millions of dollars.

"Control weaknesses identified in the two prior reports, as well as those identified in this report, allowed potentially erroneous refunds of more than $513 million to be received by taxpayers who most likely did not qualify for the Homebuyer Credit," the report states.  "Furthermore, during this final phase of the audit, TIGTA identified additional IRS employees who made questionable claims for the Credit."

Ultimately, the homebuyer's tax credit provided $29 billion to help about four million people purchase homes during the aftermath of the housing crisis, according to the IRS. The tax agency questioned some of the report's findings, pointing out its internal controls had blocked or denied more than 400,000 questionable claims.

TIGTA recommended that the IRS require taxpayers to provide documentation to support eligibility for all refundable tax credits and to seek legislation that would provide the IRS with math error authority to deny refundable credits when supporting documentation is not provided.