The first-time homebuyer credit is set to expire in several weeks, and there's a push among those in Congress and the housing industry to extend and even expand the generous credit that gives people as much as $8,000 to buy a house.
But no extension should be granted unless Congress and the Internal Revenue Service deal first with issues of fraud surrounding the credit.
The Treasury inspector general for tax administration last week reported that the IRS appears to have allowed tens of thousands of ineligible taxpayers - including some 4-year-olds - to claim millions of dollars in homebuyer credits.
After a congressional hearing on the topic last week, legislation was introduced to curb abuses. That legislation needs to be a priority before Congress decides whether the economy needs this expensive credit to be extended.
February's economic stimulus package expanded a credit created in 2008 to boost home sales. This year's version of the credit gives homebuyers up to $8,000 if they buy their first house this year between January and the end of November.
The terms are liberal and generous. To qualify as a first-timer, you can't have had an ownership interest in a house in the previous three years. The credit is refundable, so if you don't owe taxes, you can get the entire $8,000 as a refund. And you can amend your 2008 return to claim the credit now so you don't have to wait until next year to get the money.
The IRS reported that it has processed more than 1.5 million claims for the credit in the first nine months of this year. Existing home sales are expected to be up 1.5 percent this year, instead of falling 6 percent had the credit not been in place, says Walter Maloney, spokesman for the National Association of Realtors.
Yet the inspector general's office, which provides independent oversight of the IRS, issued a report last week with these disturbing findings:
* More than 19,300 electronically filed returns claimed, and collected, more than $139 million for the credit, although the taxpayers hadn't bought a house yet.
* More than 70,000 claims - worth more than $479 million - came from taxpayers whose earlier tax returns indicate they had already owned a house in the past three years. These filers, for instance, deducted mortgage interest, real estate taxes points and mortgage insurance premiums on recent returns. And more than 12,000 of these returns in recent years had claimed a residential energy credit that's only available for those with a primary residence.
* More than 580 taxpayers under the age of 18, including some not old enough for kindergarten, claimed almost $4 million in homebuyer credits. The law generally doesn't allow minors to enter into contracts, so those claims are suspect, the inspector general said.
IRS Deputy Commissioner Linda Stiff told a congressional hearing last week that there is always potential for fraud and errors when a refundable credit like this one is enacted and that the agency will "vigorously pursue those who filed fraudulent claims for the credit."
She added the IRS has identified more than 160 potential schemes that have led to dozens of criminal investigations and the agency has singled out more than 100,000 returns for audit.
That's a start. But Congress can go further to protect all the taxpayers who are footing the bill for this credit by passing legislation to reduce fraud.
That legislation, introduced by Georgia Democrat John Lewis, chairman of the House Ways and Means Oversight Subcommittee, would require taxpayers to be at least age 18 to claim the credit and provide documentation that they actually bought a house. It would also give the IRS the authority to review older returns to double-check that the taxpayer qualifies for the credit.
These changes would likely mean homebuyers would have to wait longer for their money. But it would give the rest of taxpayers more assurance that their hard-earned money isn't going to tax cheats.
