IRS Flooded With Tax Credit Requests, Slowing Process; Fraud Investigations Underway

From the Cleveland Plain Dealer
cleveland.com/realestatenews

CLEVELAND, Ohio -- Some home buyers who have requested a much-touted federal income tax credit are having to wait months to receive a refund check from the IRS.

A flood of amended tax returns and concerns about fraud have slowed the process for claiming the credit, which is aimed at first-time buyers.

As Congress works out the details of prolonging and expanding the credit offer, set to expire at the end of November, legislators are grappling with ways to make the program more efficient and less open to manipulation.

More than 1.4 million taxpayers have claimed upwards of $10 billion since 2008, when the government began offering a $7,500 credit -- a loan, really -- to people who had not owned a home in at least three years. Buyers would repay the money over 15 years. This year, Congress sweetened the package, turning the loan into an $8,000 tax credit that did not need to be repaid. To keep the cash, buyers just needed to stay in the home for three years.

The result: A boost for the moribund housing market. But along with that came a rash of fraud and innocent mistakes as people who were not qualified for the credit requested -- and received -- free government cash.

BY THE NUMBERS

A federal income tax credit has been available to first-time home buyers since 2008. It is set to expire Nov. 30.

Number of U.S. taxpayers claiming the credit:

1,426,554

Dollar amount:

$9.998 billion

Number of Ohioans claiming the credit:

48,776

Dollar amount:

$326.5 million

National rank: 33rd in terms of dollars per capita

SOURCE: Government Accountability Office (data through Aug. 22)

The Internal Revenue Service already has identified more than 160 possible fraud schemes, Linda Stiff, the agency's deputy commissioner for services and enforcement, told a U.S. House subcommittee last week. The IRS also is reviewing more than 100,000federal income tax returns that involve claims for the credit.

Recent government reports pointed out thousands of questionable claims, representing hundreds of millions of dollars. Some of the claims were filed by IRS employees. Others involved taxpayers as young as 4 years old.

As the IRS has added more fraud checks to its system, taxpayers are waiting longer for their money.

"We were getting the refunds in six weeks, and now it's taking about 20 weeks," said Marilyn Meredith, an enrolled agent who prepares tax returns in Port Huron, Mich. "The last two months is when it has really increased a lot."

Most people who buy houses this year are expected to request the credit on their 2009federal income tax return, filed in 2010. The IRS will apply the credit to whatever taxes a buyer owes and send the buyer a check for the difference. But buyers who want cash sooner have been amending their 2008 tax returns.

Those amended tax returns are filed on paper and processed manually. They go into a pool with other amended returns. The IRS receives 5 million to 7 million such returns each year, a spokesman said. Some buyers who asked for the credit in the spring are just hearing back from the IRS. And taxpayers who call to check on their refunds are being told to wait another few weeks, due to a backlog of returns and safeguards for fraud.

Filing for the credit requires no documentation of a home purchase. The form taxpayers fill out does not verify that they have not owned a home during the past three years -- a prerequisite for the credit. It asks only for the address of the home, the date of the purchase and the amount of the anticipated tax credit.

Rich Rhodes, an enrolled agent in Hinckley, tried to expedite a client's credit request by sending the IRS a settlement statement -- proof that his client bought the home. Meredith also has been attaching these statements to tax returns and writing on the forms that her clients have not owned a home in three years.

Some taxpayers are confused and probably are making mistakes on their returns, tax professionals said. People think they can request the credit before they buy a house -- not true. Others believe they can buy a home from a family member -- also prohibited.

In other cases, people are trying to fool the government. Jeffrey Schneider, an enrolled agent in south Florida, dumped two clients after they asked him to wrongly claim the credit on their tax returns. He wasn't surprised by the attempts to game a system that offers free money and requires little documentation.

"From what I've been reading, the IRS has egg on their face, all over them, because they put this nice credit out there and they get bombarded with fraud," he said.

Rep. John Lewis, a Georgia Democrat, has introduced legislation to clear up some of those problems. His bill would require taxpayers filing for the credit to be older than 18 and to provide proof of their purchase. The legislation also aims to make it easier for the IRS to run the program and to check for fraud.

A local IRS spokesman would not comment on the fraud issues. During her testimony to legislators, the IRS's Stiff said the agency will keep pursuing people who wrongly request the credit. But, she said, "We cannot let fraudulent activity undermine a program that has benefited so many."