Turning green over homeowner tax credits

Can the Internal Revenue Service handle tax credit programs that pump out billions of dollars to
homeowners and buyers? A new federal investigation on home energy tax credits suggests the answer
may be: not quite yet.

The Treasury Department’s inspector general for tax administration audited the residential tax credit
program created by Congress to encourage homeowners to install energy-saving equipment and
materials in their houses, and found some disturbing oversights.

One part of the program offers 30 percent credits — with no dollar limit — for solar energy systems,
geothermal heat pumps, wind turbines and fuel cells installed before Dec. 31, 2016. A second part of
the program — for energy-efficiency home improvements — offered credits up to $1,500 for qualifying
exterior windows and doors, insulation and roofing materials.

Both credits have been popular. More than 6.8 million taxpayers received credits during tax year 2009,
totaling $5.8 billion through December 2010. But substantial numbers of the filings had problems that
went undetected by the IRS, according to the inspector general’s investigation. In a review of 5 million
returns, auditors found that more than 302,000 taxpayers, who received a total of $234 million in
credits from the IRS, showed no evidence of actually owning a home — the minimum requirement for
eligibility.

A review of a smaller sample of returns, supplemented with local real estate property deed information,
found that 30 percent “had no record of owning a home.”

Investigators also discovered that the IRS was unable to verify other key requirements for
eligibility when taxpayers filed returns. For example, the agency could not verify that a claimant
actually “purchased a qualified energy-saving product and made energy-efficiency improvements.” Nor
could it verify the cost of the energy-saving equipment or whether the improvements were made during
the required time limits.

Since IRS Form 5695, which is used by homeowners to claim energy credits, does not require
documentation of purchases, property addresses or whether the property even qualifies as the
taxpayer’s residence, the government primarily relies on the veracity of the taxpayer in processing the
credits, and sometimes only discovers irregularities or fraud when it later audits an individual’s return.
In a response to the inspector general following the audit, the IRS said it will revise Form 5695 to require
documentation before processing credit requests.

Treasury investigators also found that the IRS was issuing credits to people who were clearly ineligible
and failed to use data that are readily available to the agency to determine eligibility. For instance,
$404,578 in energy tax credits were approved for prison inmates and underage applicants.

Prisoners “who were [incarcerated] for the entire year” — and thus not likely to have purchased and
installed energy-saving equipment — received $343,487 in federal credits. Another 100 energy tax credit
recipients in the audit turned out to be under 18 years of age — too young to execute legally binding
contracts for renovations and unlikely to own a home. Nearly one-third of the underage credit recipients
were less than 14 years old, and the youngest was just 3.

In a statement, J. Russell George, the Treasury’s inspector general for tax administration, said, “I am
troubled by the IRS’ continued failure to develop appropriate verification methods for distributing
Recovery Act credits.” The energy tax credits were expanded under the 2009 economic stimulus law,
and are a key policy initiative of the Obama administration.

The IRS’ problems handling big housing-related tax credit programs are not limited to energy
conservation. In a report last fall, the Treasury inspector general’s office found that the IRS had been
unable to distinguish between applications for first-time homebuyer tax credits for properties purchased
during 2008 and 2009. The distinction between the two years is significant because purchasers in 2008
were entitled only to a $7,500 credit that had to be repaid over 15 years. Purchasers who sought credits
during 2009, by contrast, could claim up to $8,000 and were not required to repay the money to the
government.

The same investigation found that the IRS had approved hundreds of home-purchase tax credits from
applicants who were using the Social Security numbers of dead people. Under the 2008 program,
auditors identified 1,326 individuals who claimed more than $10 million in credits for home purchases
that occurred after the claimant’s recorded date of death. More than 900 of the claimants had been
dead for at least half a year.

The IRS denied 528 of the claims, auditors found, but it approved 798 others for credits. In its response
to the earlier investigation, the IRS said it would audit the 798 questionable returns.

Ken Harney is a syndicated real estate columnist.