Treasury Inspector General for Tax Administration

Office of Audit Recovery Act

ADDITIONAL STEPS ARE NEEDED TO PREVENT AND RECOVER ERRONEOUS CLAIMS FOR THE FIRST-TIME HOMEBUYER CREDIT

Issued on June 17, 2010

Highlights

Highlights of Report Number: 2010-41-069 to the Internal Revenue Service Commissioner for the Wage and Investment Division.

IMPACT ON TAXPAYERS

Homebuyers who purchased a home in 2008, 2009, or 2010 may be able to take advantage of the First-Time Homebuyer Credit. The Credit may be an interest-free loan or a fully refundable Credit depending on when the taxpayer purchased his or her home.

Fraudulent and erroneous Credits totaling millions of dollars in refunds were issued, which increases an already burgeoning Federal deficit.

WHY TIGTA DID THE AUDIT

This audit was initiated because of the attention and priority placed on the Housing and Economic Recovery Act of 2008 which contained the First-Time Homebuyer Credit. The Credit, as expressed in the American Recovery and Reinvestment Act of 2009 and extended by subsequent bills, may confuse taxpayers regarding which version of the Credit they qualify for. Also, unscrupulous individuals may make fraudulent claims for the refundable Credit.

The President of the United States has called on Federal agencies to ensure that recovery funds are used for authorized purposes and that every step is taken to prevent fraud, waste, error, and abuse. The Internal Revenue Service (IRS) faces significant challenges to ensure that the recovery funds it administers are used for authorized purposes. This report contains interim results of two audits. The overall objectives of these two audits are to determine whether the IRS has controls in place that effectively identify erroneous claims for the Credit and to determine whether the IRS has controls in place to ensure claims for the Credit claimed on amended income tax returns are appropriately processed

WHAT TIGTA FOUND

The IRS has taken a number of positive steps to strengthen controls and help prevent inappropriate Credits from being issued. Primary among these controls was the implementation of filters to identify questionable claims for the Credit before they are processed.

However, additional controls are necessary to address erroneous claims for the Credit. Further, fraudulent and questionable claims processed prior to implementation of controls will need follow-up action by the IRS.

Control weaknesses allowed fraudulent claims filed by prison inmates totaling an estimated $9.1 million to be processed. Multiple claims for the same home were allowed. In addition, claims totaling an estimated $17.6 million were allowed for homes purchased prior to the dates allowed by the law.

Many questionable claims for the Credit made on amended tax returns were not appropriately sent to the IRS’ Examination function for scrutiny.

Further, TIGTA found additional IRS employees that had made questionable claims for the Credit.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS ensure that steps are taken to reconcile Prisoner Files from year to year. The IRS should also ensure that erroneous Credits received by prisoners and by taxpayers claiming homes that do not qualify for the Credit (including those filed on amended returns) are identified and recovered through post-refund examination activities.

In their response to the report, IRS officials agreed with all of our recommendations. They plan to continue to explore ways to enhance the accuracy and completeness of the Prisoner File and plan to take steps to ensure that the claims made by prisoners are given high priority and are subject to post-refund examinations. Also, the IRS plans to provide additional compliance scrutiny to all other inappropriate claims.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

HUhttp://www.treas.gov/tigta/auditreports/2010reports/201041069fr.htmlUH.

Email Address: inquiries@tigta.treas.gov

Phone Number: 202-622-6500

Web Site: http://www.tigta.gov