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Hundreds in 'big house' get homebuyer tax credits

By Stephen Ohlemacher
Associated Press Writer / June 23, 2010

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WASHINGTON—Living in prison didn't stop nearly 1,300 inmates from cashing in on a popular tax break for first-time homebuyers, a government investigator reported Wednesday. Their take: more than $9 million.

In all, more than 14,100 tax filers wrongly received at least $26.7 million in tax credits meant to boost the nation's slumping housing markets, said the report by J. Russell George, the Treasury Department's inspector general for tax administration.

A common scam had multiple taxpayers using the sale of a single home, with each claiming the credit. One home was used by 67 tax filers, the report said. In other cases, taxpayers got the credit for sales that happened before the tax break started.

"This is very troubling," George said. "Congress created and modified the homebuyer credit to stimulate the economy and help taxpayers achieve the American dream, not to line the pockets of wrongdoers."

The Internal Revenue Service says it is taking steps to get the money back. The agency noted that more than 2.6 million taxpayers claimed the tax credit through April -- claiming $18.7 billion in credits -- with only a tiny fraction going to prison inmates or other scofflaws.

The tax credit "has played a critical role in stabilizing the hard-hit housing market," Assistant Treasury Secretary Michael Mundaca said in a statement. "These fraudulent claims, which are being pursued to the fullest extent of the law, represent less than half a percent of the credits paid out under this program."

"As with all new and expanded programs, we are constantly working to improve implementation, and the IRS has already begun to take additional steps to prevent fraud in this program," Mundaca added.

The report blemishes an otherwise popular tax break that was sweetened once by President Barack Obama's economic recovery package and again when Congress extended it into the spring. The National Association of Realtors says the tax credit has generated 1 million new home sales that wouldn't have happened otherwise.

"Last year, we learned that children and persons who did not purchase homes were fraudulently claiming the first-time homebuyer credit," said Rep. John Lewis, D-Ga., chairman of the House Ways and Means oversight subcommittee. "Although I am pleased that the fraud identified earlier does not continue, I am concerned about prisoners claiming the credit."

Congress started the first-time homebuyer tax credit in 2008, providing couples up to $7,500 that had to be repaid, free of interest, over 15 years. The credit was essentially an interest-free loan.

Last year, Obama and Congress upgraded the credit significantly, increasing the top amount to $8,000 and ending the requirement that it be repaid.

The inspector general's report targets taxpayers who claimed the first-time homebuyers tax credit under these two programs. Since then, in November, Congress expanded the tax credit to existing homeowners, offering up to $6,500 to longtime owners who bought new homes.

The latest extension is about to expire. Homebuyers had to sign purchase agreements by April 30 and close by June 30, though there is a movement in Congress to extend the closing deadline until Sept. 30.

The IRS said it has aggressively enforced the tax credit, blocking nearly 400,000 questionable claims and opening more than 150 criminal investigations.

"These aggressive efforts have saved taxpayers more than $1 billion," the IRS said in its statement.

Nevertheless, 1,295 prison inmates were able to get $9.1 million in credits, including 241 who were serving life sentences, the IG's report said. None of the inmates filed joint returns, so the claims could not have been for purchases by spouses.

Many prisons provide inmate information to the IRS, but they are not required to do so, which makes reporting uneven, the report said.

The IRS is asking Congress for legislation ensuring the agency gets up-to-date inmate information, IRS spokesman Frank Keith said. In the meantime, the IRS plans to reach out to local, state and federal prison officials to start a task force to improve information-sharing on inmates.

"When IRS has reliable data, we do a very effective job of using it to ensure compliance," Keith said. "When IRS does not have reliable data, it is a much more difficult process for us."

The IG report estimates that 2,555 taxpayers wrongly received $17.6 million in tax credits for homes that were bought before the credit was enacted.

An estimated 10,282 taxpayers wrongly received credits for homes that were also used by other taxpayers to claim the credit. Investigators were unable to quantify the amount of money they received, "but all indications are that the total will be in the tens of millions of dollars," the IG's office said in a statement.

Investigators also found 87 IRS employees who may have improperly claimed the credit, though the review was ongoing.