First-Time Homebuyer Tax Credit Is Fraudster's Delight

The program that extends a tax credit to first-time home buyers might be propping up more than the housing market. According to a report just released by the Treasury, scammers are benefitting too. The report cites widespread fraud in the program meant to help the ailing housing market to heal more quickly by creating more buyer demand. This is particularly notable right now, since Congress must decide whether to extend the program past November. This report could hurt its chances.

Here's some detail via the New York Times:

A previously undisclosed report from the Treasury Department's inspector general said that as of Sept. 30, the Internal Revenue Service had identified 167 suspected criminal schemes and opened nearly 107,000 examinations of potential civil violations. In late July, the I.R.S. announced its first successful prosecution.

I don't find this terribly surprising. But 107,000 is a pretty big number. That's nearly 8% of the 1.4 million homes sales have claimed the credit. Of course, not all of those investigations will turn up fraud. I doubt that most will. But still, even a few percent is a pretty huge portion.

Should this report of fraud cause Washington to let the credit expire? I think it depends on how costly that fraud turns out to be. If this fraud is relatively easy and inexpensive to identify and eliminate, then I wouldn't be too concerned. If deep investigation is necessary, making the program far more costly because of the fraud, then that is a problem.

Ultimately though, you have to ask the question of whether or not the benefit exceeds the cost of the program -- and that includes the expense of fraud that comes along with it. I'd suspect that virtually every government handout results in some scamming. If fraud is significantly more prevalent or expensive than usual in this program, then that could prove its was constructed poorly, and perhaps a better design should be sought. But if encouraging first-time home buyers to take the plunge in a bad real estate market remains an important economic policy action, then the entire strategy shouldn't be shelved.