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A new IRS watchdog report reveals that tens of thousands of people may have exploited the first-time homebuyer tax credit. According to the IRS probe, some of the fraudulent recipients of the $8,000 tax credit include four-year-olds and illegal immigrants. Almost 100,000 of the 1.5 million people who claimed the first-time homebuyer credit were not eligible for it, according to the tax administration’s inspector general. The fraudulent claims cost the federal government about $500 million. The rampant fraud may jeopardize the future of the tax credit program.
Extent of Fraud
The probe reports that over 19,000 people who claimed the tax credit on their 2008 returns had not even purchased a home yet. Another 74,000 people who claimed the credit had indications of previous homeownership. The IRS now checks tax credit claims for evidence of prior deductions for mortgage interest in order to limit fraud by prior homeowners. Among the most egregious examples of fraud are claims by non-U.S. citizens, IRS employees, and people under the age of 18. In fact, 580 people not of legal age claimed the tax credit, costing the government about $4 million. The youngest was four years old.
IRS Faulted
Many lawmakers blame a lack of vigilance on the part of the IRS for the massive tax credit fraud. The Treasury Inspector General, J. Russell George, says that the IRS did not require documents from taxpayers substantiating the purchase of a home. The IRS claims that it did not have the capability to accept these documents electronically. Although the agency has taken steps to correct these oversights, most of the damage has already been done.
Fraud Energizes Critics
Critics of the first-time homebuyer tax credit have argued that the credit only doles out cash to people who would have bought a home anyway. Lawmakers who oppose the credit also say that cash-back tax credits create a massive incentive to defraud the government. The credit thus attracts the wrong element and has cost the government a total of $10 billion in tax revenue.
Bad Timing
The news of the fraud comes amid talk in Congress of expanding the program. Certain lawmakers would like to extend the deadline of the program to the end of 2010. The credit’s most fervent advocates support doubling the incentive to $16,000 and applying it to all homebuyers. Reports of the costly and widespread fraud may cripple these efforts to broaden the program, created by the American Recovery and Reinvestment Act of 2009.
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