Fraud Involving Home Buyer Credit Increases

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The government home buyer credit didn't only appeal to first-time purchasers: fraudsters loved it too. A new report indicates that more people have been trying to claim the credit who don't actually qualify than we thought in October. At that time, it found 107,000 potential violations. Now we learn that the IRS has moved to block or deny nearly 400,000 questionable claims. Some of the details are pretty ugly.

How widespread is the fraud? According to Bloomberg:

About $1.22 billion of the $12.6 billion in tax credits claimed through February were denied or frozen after audits, the report from the Treasury Department's Inspector General for Tax Administration said. The IRS estimated that about 1.8 million taxpayers sought the benefit, which totals as much as $8,000, from the inception in April 2008.

That's a 10% fraud rate, which is uncomfortably high. But the fact that the IRS found these is actually the good news, because these guys were caught. Some of bogus credits were awarded and lost forever. The report's press release provides some examples:

  • 2,555 taxpayers receiving credits totaling $17.6 million for homes purchased prior to the dates allowed by law.
  • 1,295 prisoners receiving credits totaling $9.1 million who were incarcerated at the time they reported that they purchased their home. These prisoners did not file joint returns, so their claims could not have been the result of purchases made with or by their spouses. Further, TIGTA found that 241 prisoners were serving life sentences at the time they claimed that they bought new primary residences.
  • 10,282 taxpayers receiving credits for homes that were also used by other taxpayers to claim the credit. (In one case, TIGTA found that 67 taxpayers were using the same home to claim the credit.) TIGTA auditors have not fully quantified the total of these erroneous credits, but all indications are that the total will be in the tens of millions of dollars.
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And here's an amusing statement by Inspector General J. Russell George:

The good news is that the IRS has made significant strides resolving problems associated with this program. For example, no minors received the Credit, according to our report. However, the bad news is that prisoners are allegedly improperly receiving the Credit for buying homes while they are incarcerated.

Yes, it's good that all those middle-schoolers looking to claim tax credits (or really, the adults pretending to be middle-schoolers) have been stopped. But why haven't the convicts? Perhaps when you're sitting in a jail cell, you have lots of time on your hands to think up ways to swindle the government.

Any time the government creates a problem like this it just screams to scammers. It's not realistic to assume that all fraud can always be caught. But there seems to be some negligence at play with such a high fraud rate and such flagrant examples of wrongdoing, like people sitting in jail with life sentences successfully claiming the credit. And remember: this report just talks about just the cases we know about.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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