Can the IRS handle the homebuyer tax credit program basics?

The federal homebuyer tax credit programs have been widely praised for stimulating real estate sales, but also reviled by critics who see the credits as a multibillion-dollar waste of the government’s money. 

Now a new audit raises questions about the ability of the IRS to handle key basics of the programs, such as determining the year credit claimants actually purchased their houses, whether they have retained the property as a principal residence, and even if they were alive when a tax credit application was submitted in their name. 

The audit by the Treasury Department’s inspector general for tax administration praised the IRS for its recent efforts to develop a “comprehensive strategy” to keep track of the credit programs but identified deficiencies in a small but significant number of cases involving claims for credits. 

For example, auditors found that the IRS has had trouble distinguishing between houses purchased during 2008 and those bought in 2009. This can be an important distinction since first-time purchasers in 2008 were limited to tax credits up to $7,500 that must be repaid annually over a 15-year period. By contrast, purchasers who opted to claim a revised version of the credit during 2009 — for up to $8,000 — were not subject to the annual repayment requirement. 

Out of approximately 1.77 million credit filings during 2009, auditors said they identified 73,119 individual returns from taxpayers who received credits whose account records at the IRS had incorrect — or no — purchase dates: 

— 59,802 recipients who purchased their homes in 2009 were incorrectly recorded by the IRS as having purchased during 2008, or no year was identified. 

— 9,122 credit recipients actually bought their homes during 2008, but the IRS recorded the purchases as occurring in 2009. This could result in potential tax revenue losses to the government of nearly $31 million, auditors estimated, since these individuals might not be asked to repay the homebuyer credit over 15 years even though their 2008 purchase date required them to do so. 

— 4,195 recipients’ claim forms had no purchase date stated or the purchase occurred prior to 2008. “These claims should not have been processed,” auditors said. 

Beyond these claims, a total of 514,987 tax credit requests contained purchase dates that “cannot be verified” because the data were not “captured” by IRS computers. 

The Treasury’s inspector general also focused on another set of problems: The IRS’ lack of systems to enforce the various “recapture” and “accelerated repayment” provisions that Congress included in the housing tax credit programs. 

“Currently, the IRS does not have the ability to identify individuals” who received the homebuyer credit but subsequently may not retain the property as their principal residence — a key requirement imposed by Congress. For the $7,500 credit covering purchases made from April 9, 2008, through Jan. 30, 2009, recipients who sell the home before the end of the 15-year payback period are expected to repay the credit to the IRS “immediately” — on the tax filing for the year in which the home is sold. 

In the case of the 2009-era credits — up to $8,000 for first-time buyers, $6,500 for qualified repeat purchasers — the credit must be repaid if the home is sold within three years of acquisition. The repayment is due on the taxpayer’s return filed in the year of the sale. Because the IRS has no systems in place to detect early sales or conversions of properties from principal residences, auditors said, it must rely on individuals to disclose such information voluntarily. The agency is now developing systems to keep track of repayment and recapture events using third-party sources of real estate and other data, said the report. 

Auditors also found the IRS has no system at present to identify situations that allow certain taxpayers to bypass recapture rules, such as the death of the homeowner, foreclosures where there is no gain to the taxpayer, and extended overseas duty assignments of armed forces and other personnel that prevent them from occupying their houses. 

Still another deficiency, auditors said, is IRS’ handling of homebuyer tax credit claims from applicants using the Social Security numbers of dead people. In the 2008 credit program, the audit identified 1,326 individuals who claimed a total of $10.1 million when the home purchase date occurred after the purported claimant’s date of death. 

In 951 claims the individual whose Social Security number was used had been dead for at least half a year. The IRS denied 528 of the 1,326 total claims — worth about $4 million — but 798 claimants using dead persons’ Social Security identifications apparently received credits. The IRS has agreed to audit those 798 tax returns, according to the inspector general’s report.