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Home buyer tax credit fraud

Scott Jagow Oct 22, 2009

Congress is trying to decide whether to extend the first time home buyer’s tax credit of $8,000. Here’s one thing to consider: how many people are cheating, and why isn’t the IRS catching them?

From NPR:

Russell George, the inspector general who watches over the IRS, is bewildered by the way the agency set up the program.

“This is one of the largest refundable credits in the history of the Internal Revenue Service,” George says. “As they are well aware, there are people who do not want to pay taxes. If you give them any opportunity to avoid paying it, certain people will.”

In a recent audit, George’s office highlighted nearly $500 million in homebuyer tax credits claimed by people who don’t appear to qualify.

Oh, but it doesn’t stop there. The IRS doesn’t require documentation to prove the person getting the credit actually bought a home.

Let me repeat that. The IRS isn’t requiring people to prove they bought a house, let alone a “first” home. More from NPR:

“It wouldn’t necessarily give us the ability to automatically disallow the claim,” says Frank Keith a spokesman for the IRS.

He says the IRS doesn’t have the authority to reject a claim for the tax credit without doing a full audit first. Keith says his agency has flagged more than 100,000 tax returns for a second look.

“I think we’ll find some where the taxpayer perhaps has made an honest mistake,” Keith says. “And I think we’ll find those cases in which the taxpayer has intentionally filed a claim for a credit knowing full well that they weren’t eligible.”

Just yesterday, a tax preparer in Florida was sentenced to 30 months in prison for illegally claiming the home buyer tax credit. Apparently, he told some of his clients they could qualify if they were “merely thinking about buying a house.”

The tax inspector general’s office will testify at a House committee hearing today about all of this. You can read the report here.

If the fraud isn’t enough to convince Congress to drop the credit, Marketplace’s economics correspondent Chris Farrell says it’s time for the government to get out of the business of propping up the housing market:

I know the real-estate industry, they’re saying, “This is the end of the world.” It’s not and we should stop subsidizing this industry. There is nothing wrong — this is a radical statement I know — but there is nothing wrong with renting.

As we’ve been vigorously debating the past week, subsidizing the purchase of homes is highly controversial, considering what the economy’s just been through. Subsidizing people who aren’t buying homes is beyond controversial. It should be criminal.

And it is.

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