Imagine a Government Program Invites Fraud
Keep in mind even if you have a home for sale in Everett this type of fraud doesn’t affect you. Before we get into the meat of this article lets remember Medicare, Medicaid and workers compensation fraud. Just a quick Google search reveals that between the three there is fraud in excess of $120 Billion dollars. I’ll just bet the “Cash for Clunkers” was rife with fraud. Just think about the fraud and waste a multi BILLION dollar health care bureaucracy will generate.
Since the first time home buyer credit was enhanced and extended the feds seem to think the fraud is at acceptable levels. I have been told that 582 children have filed for and been paid the full $8000 credit.
It’s disheartening that problems would surface in the one plan that is housing’s primary driver, but I guess the fraud disclosure should not come as a surprise. Mortgage scams have been in the news. And we are just now getting an indication of how many consumers are willing to participate — especially if they think there is a chance the Internal Revenue Service will not discover their creative maneuvers.
The Treasury Inspector General for Tax Administration after reviewing their audit procedures was able to determine that IRS didn’t have effective controls in place to detect fraud in the program. It developed computer programs to identify 73,799 buyer credits attached to returns totaling almost $504 million that were claimed by taxpayers who had indications of prior home ownership within three years. This is a no- no under the old rules.
The original rules for claiming the first time home buyer credit defined a first time buyer as one who hadn’t had home ownership in the previous three years. According to the audit, the 73,799 taxpayers had entered information on their individual income tax returns for one of the prior three years indicating they may have owned a home. These entries included deductions for home mortgage interest, real estate taxes, deductible points, and qualified mortgage insurance premiums.
IRS had no significant controls in place to check on eligibility for the credit. There were no controls to identify many questionable claims for the credit, many key controls were missing, according to the inspector. Missing from the suggested safeguards was information provided on the form to verify eligibility requirements. In addition, taxpayers were not required to provide documentation that they actually purchased a home. The new extended credit includes proof of purchase.
According to the audit summary, IRS auditors identified 19,351 tax year 2008 electronically filed tax returns on which taxpayers claimed credits totaling over $139 million for homes that had not yet been purchased. It was during these audits that several 4 year old “taxpayers” were identified.
“Through July 25, 2009, we identified 582 taxpayers under 18 years of age who claimed almost $4 million in first-time homebuyer credits. A child under the age of 18 cannot sign a binding contract. The contract is unenforceable and therefore worthless.
Approximately 28 percent of the 582 taxpayers under age 18 that were identified did not meet the IRS income screening criteria. In 64 of these cases, other IRS filters flagged the claim for further scrutiny. However, 101 of the claims (totaling $626,779) made by children under the age of 18 did not meet any of the IRS screening criteria.
According to the audit, the IRS believed that its filters identifying taxpayers claiming the credit who had adjusted gross Incomes below certain levels would catch the questionable claims. Until the audit the controls for income levels were not adequate.
While many taxpayers will be identified by recently implemented IRS filters and are subject to pre-refund audits, the inspectors identified 70,005 taxpayers whose tax returns were processed prior to the implementation of the filters.
Clearly, the IRS underestimated the need for basic first-time homebuyer safeguards in the credit program — and probably the popularity of the program itself.
Now it will get another chance to redeem itself. The first-time buyer program has been extended until April 30. Buyers who make a deal by then will have until June 30 to close and received the $8,000 credit. The program was also expanded to include people who have owned a home for five years and are buying a new one. They have the same deadlines and will qualify for a $6,500 credit. Some of the original tax returns that were fraudulent now qualify for the credit. So some cheats will still keep the money. Now that is luck.
So now if you have a home for sale in Everett you just might qualify for the new $6500 credit.