First Time Homebuyer Credit

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Senate considers expansion of First-Time Homebuyer Credit

"A group of Senators, including Senate Banking Committee Chairman Chris Dodd, are moving to extend the $8,000 first-time homebuyers tax credit and extend it to all homebuyers.

Sen. Johnny Isakson (R-GA) who had previously owned a real estate company before being elected as Georgia’s junior Senator, told the Senate banking committee on Wednesday that the real estate market would likely remain depresses for five years or longer if the government doesn’t step in to encourage slow home sales and make additional moves to decrease unemployment.

Isakson recommended to the committee that Congress extends and expands the credit by increasing the eligibility limit to $300,000 to bring more buyers into the housing market.

“If we don’t do this housing tax credit, in my personal opinion, and extend it through midyear next year and take away the first-time homebuyer means test and raise the income qualification, we will have a dramatic and awful situation in the United States of America from which recovery is going to be even more difficult than we’ve experienced already,” Isakson testified.

Chairman Dodd is hoping to stimulate homebuyers that are “moving on up” by encouraging people to upgrade from their first-home to a more expensive one. Dodd said, with first-timers, “You’re living on a futon in a…bare bones deal, because you — you got that house…and you’re trying to make ends meet,” Dodd continued, “It’s that move-up market, where you start to get what I call sort of a ripple effect, that is always so important in housing.”

The senate had previously considered applying the tax credit to all homebuyers this year, but threw out the idea because it was deemed to be too expensive. Isakson estimated that his proposal would cost the government $16.7 billion in lost revenue but would have a multiplier affect many times that in home improvement investments, as well as furniture and appliance purchases.

Home-buyer credit tempts tax cheats

"Tens of thousands of people submitted suspicious -- and possibly fraudulent -- claims for a federal tax credit meant for first-time home buyers, tax officials told Congress Thursday.

The Treasury tax-oversight office said at least 19,000 filers who hadn't bought homes claimed $139 million in tax credits and were reimbursed, raising new worries about the housing stimulus as lawmakers consider extending the credit.

Treasury oversight officials said they have found an additional 74,000 tax-credit claims, valued at $500 million, where evidence of previous homeownership could make their claims invalid.

More than 500 people under the age of 18, including a 4-year-old child, also had their names on applications for the credit, which has no minimum-age requirement, federal officials said at a hearing on abuses of the program. Most of the claims involving children were made by parents who purchased a home but were ineligible for the credit because their incomes were too high, said J. Russell George, the Treasury inspector general for tax administration. The tax-oversight office doesn't answer to the Treasury secretary.

The problems are potentially troublesome for backers of the credit -- including real-estate agents, home builders and mortgage bankers. They want Congress to extend and expand it to all home buyers, not just first-time buyers. The credit, which is valued at as much as $8,000 for new-home buyers, is set to expire Nov. 30.

Rep. Charles Boustany Jr. (R., La.) said the problems show the dangers in creating refundable tax credits that give money to filers even if they didn't owe any taxes. "Every time Congress creates a new refundable credit...the incentive for fraud is magnified," he said.

The credit's main sponsor, Sen. Johnny Isakson (R., Ga.), said he is "cautiously optimistic" that an extension -- with procedural safeguards added -- can move in the Senate next week. "Just because someone used fraud [to claim the credit] doesn't mean the credit is a bad idea, it means there are some bad folks running around," he said.

The Internal Revenue Service and Justice Department are investigating more than 100 suspected criminal schemes involving the credit. This week, a Jacksonville, Fla., tax-return preparer, James Otto Price III, was sentenced to 30 months in prison after pleading guilty to willfully preparing false tax returns. Authorities said he prepared at least 15 tax returns that falsely claimed the home-buyer credit, according to a Justice news release.

While individuals who knowingly filed false claims also could be subject to prosecution, criminal-fraud charges would be more likely against tax preparers. The IRS also is conducting more than 100,000 examinations that could require filers to give back the credit and pay civil penalties.

The authorities blamed a lack of safeguards, including lack of documentation requirements, for the extent of the problems. Many of the apparently bogus claims occurred before the IRS updated its computer programs to automatically check claims against other available information.

Rep. John Lewis (D., Ga.), chairman of the House Ways and Means oversight subcommittee, introduced legislation Thursday aimed at making it more difficult for would-be scammers to receive the credit. His bill adds a minimum age of 18 to claim the credit and requires filers to document their claims by submitting the standard disclosure form used in home-sale closings, the HUD-1 form.

The credit, adopted as part of the February stimulus bill, modified and expanded on a tax credit that was first passed by Congress in 2008. The current credit is available only to first-time buyers who purchased a primary residence since April 9, 2008. The full credit is available to individuals with incomes of less than $75,000 and $150,000 for married couples."

GAO on First-time Homebuyer Credit

I appreciate this opportunity to comment on taxpayers’ use of the First-time Homebuyer Credit (FTHBC) and the Internal Revenue Service’s (IRS) implementation and compliance challenges.

As an important part of the recent economic stimulus efforts, Congress enacted the FTHBC to assist the struggling real estate market and encourage taxpayers to purchase their first home. The credit initially was enacted by the Housing and Economic Recovery Act of 2008 (Housing Act) and revised by the American Recovery and Reinvestment Act of 2009 (Recovery Act).1

The 2008 FTHBC provided taxpayers a credit of up to $7,500 that must be paid back over 15 years. The Recovery Act increased the maximum credit for the 2009 FTHBC to $8,000, with no payback required unless the home ceases to be the taxpayer’s principal residence within 3 years. This $8,000 credit is a refundable tax credit that is paid out even if there is no tax liability or the credit exceeds the amount of any tax due.

The 2009 FTHBC was enacted into law on February 17, 2009, but eligibility was made retroactive for homes purchased beginning January 1, 2009. See appendix I for a comparison of the 2008 and 2009 FTHBC.

My testimony today, based on on-going work, describes two issues:

  • the extent to which taxpayers are using the FTHBC, including breakouts by state and income; and
  • IRS’s implementation and compliance challenges associated with both the 2008 and 2009 credits.

To describe the extent to which taxpayers are using the FTHBC, we obtained and analyzed data from IRS about the use of the FTHBC and reviewed IRS documents. We ensured these data were reliable by reviewing IRS’s computer programs for capturing the data and discussing the computer programming and verification processes with IRS officials. While combined 2008 and 2009 data appear reliable, the data for each of the years do not. This is because some claims were filed by taxpayers for the 2008 credit who actually could have claimed the 2009 credit, and IRS did not flag the problem.

In following up on 47,276 electronically filed returns that appeared not to have claimed the whole FTHBC, the Treasury Inspector General for Tax Administration (TIGTA) found that 93 percent, or 43,967, were not coded as a 2009 FTHBC even though the purchase had occurred in 2009. It is likely that the errors are a result of

  1. taxpayers who purchased a house in 2009 prior to the passage of the Recovery Act and claimed the 2008 credit, when, in fact, they are eligible for the expanded benefits of the 2009 credit; and
  2. IRS’s not properly coding the purchase date as a 2009 FTHBC on some returns.

IRS has plans to monitor instances where taxpayers claimed the 2008 instead of the 2009 credit. When those taxpayers do not file an amended return, IRS has plans to notify them as to their eligibility for the expanded benefits of the 2009 credit. According to IRS officials, IRS plans to correct the other errors when it begins enforcing the 2008 FTHBC payback provisions. At that time, IRS plans to verify the date of purchase and make any adjustments.

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