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Saturday, April 16, 2011

IRS Allowed $500m of First-Time Homeowner Credits to Ineligible Taxpayers (Including 128 IRS Employees)

TIGTA The Treasury Inspector General for Tax Administration has released Administration of the First-Time Homebuyer Credit Indicates a Need for Improved Controls Over Refundable Credits (2011-41-035):

Homebuyers who purchased a home in 2008, 2009, or 2010 were able to take advantage of the First-Time Homebuyer Credit. The Homebuyer Credit allowed eligible taxpayers to claim up to an $8,000 refundable credit on their tax return. Fraudulent and erroneous Homebuyer Credits totaling millions of dollars in refunds were issued, revealing a need for not only stronger controls over claims for the Homebuyer Credit, but also for strengthening controls over all refundable credits. ...

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. Furthermore, during this final phase of the audit, TIGTA identified additional IRS employees who made questionable claims for the Credit.

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Comments

Those who like to chip away at taxpayer rights will love the TIGTA idea of making almost anything a "math error." What the law says is that taxpayers receiving a math error notice can ask IRS, within 60 days, to issue a notice of deficiency. That way, the dispute about a math error that has nothing to do with math errors can be taken to Tax Court.

However, there is no deadline for IRS to issue a notice of deficiency. In the case of homebuyer credit denials, where the error was made by IRS and not the taxpayer, the IRS just sits on the request for as long as they want. One of my clients waited six months. Taxpayer Advocate said they were powerless; it was happening in many cases.

She eventually received her refund, after asking for help from her Senator on the Finance Committee. IRS also paid her (from taxes they collected from widows and orphans) 4% interest on the delayed payment. Better than she would have earned at the bank, but the money would not have gone to the bank -- it would have been spent on furniture for the new house.

Posted by: Bob | Apr 16, 2011 11:05:12 AM

The IRS has 3 years to issue a 90 day letter otherwise the SOL expires (absent special exceptions extending the SOL). So there IS a deadline for the IRS to issue a 90 DL. And the IRS issues 90 DL's when they think TPs OWE money, not are due money. So 90 DL's are a red herring.

If the TP believes he/she is due a refund, file a refund claim with the IRS. If the IRS does not act w/in 6 months, the TP can file a claim for refund in court (or sooner if the refund claim is denied by the IRS).

I really fail to see what you are moaning about. by your own words, TPs who receive math error notices can go to tax court. by law, TPs who want refunds have to wait no more than 6 months to go to US district court (or CFC).

As for interest, that amount is set by statute. The IRC specifies the amount of interest paid on an underpayment or overpayment. So your client got 4% because that is what she was due by law.

Posted by: tax guy | Apr 16, 2011 4:37:19 PM

Yes, no problem, District Court is just as easy and inexpensive and expeditious as Tax Court. And the judges there, already overburdened with immigration cases, really appreciate a tax case for a change.

Posted by: Bob | Apr 16, 2011 5:32:58 PM

The simpler government is, the harder it is to commit fraud like this. Simplify the tax code and reduce fraud. Then simplify benefits, and reduce fraud. The reason politician don't want to reduce fraud is that either they or their friends are benefiting. No rocket science here.

Posted by: Milwaukee | Apr 17, 2011 5:26:08 PM

What was the total tax credit claimed? If this is $500 million out of a billion or two, there's serious fraud or confusion. If it's out of 50-100 billion it's about what you'd find studying any tax provision -- some number of people get it wrong, some number (taxpayers or professional preparers) don't know what they're doing, and some number are trying to get away with something.

It would also be interesting to see how many people did not take the credit that were eligible for it (likely much harder to determine).

Posted by: Thomas Wicklund | Apr 17, 2011 6:07:36 PM

I filed an amended return when I purchased my house with the thought that I'd be able to do some repairs and upgrades with the first time home-buyer tax credit. Big mistake. Because it was an amended return, my tax software put my old address on the form, which was apparently a big red flag for the IRS. Instead of spending the money on new windows (and getting another tax credit on them) I spent 9 months fighting with the IRS to get my money. I missed the energy credit I would have been eligible for and paid much higher heating bills all winter long (to the tune of hundreds of dollars). If you Google around, you'll find that many, many, many people were in the same situation as I was.

What troubles me is that the IRS put myself and (tens of?) thousands of others through the wringer, and still ended up with this much fraud.

Posted by: Tim | Apr 18, 2011 2:55:35 PM