Report: IRS pays out $513 million in tax credits to homebuyers who didn’t qualify

Other credits went to more than 1,000 prison inmates — worth $7.7 million — couples who both claimed the tax credit — worth about $11.4 million — taxpayers who bought homes before the credit went into effect — about $17.6 million — and to more than 13,400 people who did not actually buy homes, claiming $97.8 million in credits, although the IRS argued the estimates are too high. 

In addition, the IRS disallowed $531,134 in tax credits claimed by 96 taxpayers who were under age 18, making it unlikely they purchased a home, according to the report. 

“The IRS has taken positive steps to strengthen controls and help prevent the issuance of inappropriate homebuyer credits,” George said. “However, many of the actions occurred after hundreds of thousands of homebuyer credits had already been issued, including fraudulent and erroneous credits totaling millions of dollars.”

The report recommended, and the IRS agreed, that the agency should seek legislation to provide the agency with math-error authority to deny credits when supporting documentation is not provided for a refundable credit.

“The timing and differences in the various legislative provisions also created complexity and confusion for taxpayers and return preparers, as well as the real estate industry,” the IRS said in a written response to the audit. “The IRS addressed this challenge by providing timely, understandable and extensive outreach and education to the public. Nevertheless, this complexity undoubtedly contributed to numerous errors and erroneous claims.”

Eligible homebuyers who purchased a home in 2008, 2009 or 2010 could claim up to an $8,000 refundable credit on their tax return. In November 2009, Congress extended the credit through April 30, 2010, and expanded it to longtime owners who bought new homes. They had until Sept. 30 to complete their purchases. There were income requirements on top of purchase restrictions. 

The popular yet complicated tax credit, which provided nearly $27 billion to roughly 4 million taxpayers, was designed to get the struggling housing market moving again and provide a boost to the economy during the recession. 

In 2009 and 2010, the IRS reported that it issued tax credits of $12.3 billion and $13.7 billion, respectively, on par with expected estimates. 

In all, the agency examined more than 400,000 returns, saving more than $1.3 billion, and identified more than 200 criminal schemes, according to the agency response.