Home-Buyer Credit Tempts Tax Cheats By Martin Vaughan and John D. McKinnon Wall Street Journal 10-23-2009

Home-Buyer Credit Tempts Tax Cheats
By Martin Vaughan and John D. McKinnon
The Wall Street Journal
October 23, 2009

Tens of thousands of people submitted suspicious -- and possibly fraudulent -- claims for a federal tax credit meant for first-time home buyers, tax officials told Congress Thursday.

The Treasury tax-oversight office said at least 19,000 filers who hadn't bought homes claimed $139 million in tax credits and were reimbursed, raising new worries about the housing stimulus as lawmakers consider extending the credit.

Treasury oversight officials said they have found an additional 74,000 tax-credit claims, valued at $500 million, where evidence of previous homeownership could make their claims invalid.

More than 500 people under the age of 18, including a 4-year-old child, also had their names on applications for the credit, which has no minimum-age requirement, federal officials said at a hearing on abuses of the program. Most of the claims involving children were made by parents who purchased a home but were ineligible for the credit because their incomes were too high, said J. Russell George, the Treasury inspector general for tax administration.

The problems are potentially troublesome for backers of the credit -- including real-estate agents, home builders and mortgage bankers. They want Congress to extend and expand it to all home buyers, not just first-time buyers. The credit, which is valued at as much as $8,000 for new-home buyers, is set to expire Nov. 30.

Rep. Charles Boustany Jr. (R., La.) said the problems show the dangers in creating refundable tax credits that give money to filers even if they didn't owe any taxes. "Every time Congress creates a new refundable credit...the incentive for fraud is magnified," he said.

The credit's main sponsor, Sen. Johnny Isakson (R., Ga.), said he is "cautiously optimistic" that an extension -- with procedural safeguards added -- can move in the Senate next week. "Just because someone used fraud [to claim the credit] doesn't mean the credit is a bad idea, it means there are some bad folks running around," he said.

The Internal Revenue Service and Justice Department are investigating more than 100 suspected criminal schemes involving the credit. This week, a Jacksonville, Fla., tax-return preparer, James Otto Price III, was sentenced to 30 months in prison after pleading guilty to willfully preparing false tax returns. Authorities said he prepared at least 15 tax returns that falsely claimed the home-buyer credit, according to a Justice news release.

While individuals who knowingly filed false claims also could be subject to prosecution, criminal-fraud charges would be more likely against tax preparers. The IRS also is conducting more than 100,000 examinations that could require filers to give back the credit and pay civil penalties.

The authorities blamed a lack of safeguards, including lack of documentation requirements, for the extent of the problems. Many of the apparently **** claims occurred before the IRS updated its computer programs to automatically check claims against other available information.

Rep. John Lewis (D., Ga.), chairman of the House Ways and Means oversight subcommittee, introduced legislation Thursday aimed at making it more difficult for would-be scammers to receive the credit. His bill adds a minimum age of 18 to claim the credit and requires filers to document their claims by submitting the standard disclosure form used in home-sale closings, the HUD-1 form.

The credit, adopted as part of the February stimulus bill, modified and expanded on a tax credit that was first passed by Congress in 2008. The current credit is available only to first-time buyers who purchased a primary residence since April 9, 2008. The full credit is available to individuals with incomes of less than $75,000 and $150,000 for married couples.