RECOVERY
ACT
First-Time Homebuyer Credit Repayment Notices Were Incorrect, and the Method Used to Identify Dispositions Is Unreliable
September 15, 2011
Reference Number: 2011-41-097
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
Redaction Legend:
1 = Tax Return/Return Information
Phone
Number | 202-622-6500
Email Address | TIGTACommunications@tigta.treas.gov
Web Site |
http://www.tigta.gov
HIGHLIGHTS
FIRST-TIME HOMEBUYER CREDIT REPAYMENT
NOTICES WERE INCORRECT, AND THE METHOD USED TO IDENTIFY DISPOSITIONS IS UNRELIABLE
Highlights
Final
Report issued on September 15, 2011
Highlights of Reference Number:
2011-41-097 to the Internal Revenue Service Commissioner for the Wage and Investment Division.
IMPACT ON TAXPAYERS
Each
of the laws which provide First-Time Homebuyer Credits (Homebuyer Credit)
contains different Homebuyer Credit amounts, qualification requirements, and repayment
requirements. Our review identified
inaccuracies relating to the issuance of Homebuyer Credit repayment notices. In addition, the method used to identify
individuals who may have disposed of their principal residence was not
reliable.
WHY TIGTA DID THE AUDIT
TIGTA is required to monitor the Internal Revenue Service’s (IRS) implementation
of American
Recovery and Reinvestment Act of 2009 provisions. The IRS reported a total of $29.7 billion
in Homebuyer Credit claims were made by more than 4 million individuals as of May
7, 2011. Our overall objective was to
evaluate the effectiveness of IRS processes to ensure the accurate and timely
repayment of the Homebuyer Credit.
WHAT TIGTA FOUND
The IRS
is continuing to take actions to develop and implement Homebuyer Credit
repayment processes and procedures.
However, our review identified notice programming errors which resulted
in 13,327 individuals (including deceased individuals) who received or would
have received incorrect notices, 18,220 individuals not receiving notices, and
29,880 individuals receiving incorrect notices because of incorrectly recorded
home purchase dates. TIGTA also
identified that the IRS’s Recapture File sent to the third-party vendor for
research to identify individuals who may have disposed of their principal
residence did not include 31,062 individuals who received the Homebuyer Credit
through February 2010.
In addition, our review found that the research methodology performed
by the third-party vendor is incorrectly identifying current addresses. As a result, some individuals incorrectly
received a Notice CP03c, which is sent to individuals when the IRS has
information that there was a change to the individual’s principal
residence. For the 86,609 individuals who
received a Notice CP03c, 53,558 (62 percent) received this notice because
the third-party vendor incorrectly indicated the individual’s address did not
match the address in the IRS’s Recapture File.
Finally, our review of the third-party vendor’s research results
for a statistically valid sample of 97 taxpayer accounts determined that for 40 (41 percent)
of the taxpayer accounts, the information provided to the IRS had incomplete or
inaccurate information.
WHAT TIGTA RECOMMENDED
TIGTA
recommended that the Commissioner, Wage and Investment Division, ensure
Homebuyer Credit repayment notices are accurately issued, correct the purchase
dates for the 2,535 tax accounts TIGTA identified as still having an incorrect
purchase date recorded on the IRS’s computer system, and discontinue using
third-party vendor data to identify individuals who may have disposed of their principal
residence unless the reliability can be significantly improved.
The
IRS agreed with two recommendations and plans to refer the 2,535 tax accounts
to the Accounts Management function for analysis and corrections, complete its
evaluation of the use of third-party vendor data, and reevaluate the use of its
own internal data. For the remaining
recommendation, the IRS plans to replace the Notices CP03a and CP03b with a
web-based tool that it plans to make available to taxpayers for the 2012 Filing
Season.
September 15, 2011
MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: (for) Michael R. Phillips /s/ Margaret E. Begg
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – First-Time Homebuyer Credit Repayment Notices Were Incorrect, and the Method Used to Identify Dispositions Is Unreliable (Audit # 201040107)
This report presents the results of our review to evaluate the effectiveness of the Internal Revenue Service processes to ensure the accurate and timely repayment of the First-Time Homebuyer Credit, including individuals who do not self-identify a disposition of their primary residence. This review was included in our Fiscal Year 2010 Annual Audit Plan and addresses the major management challenge of Implementing Tax Law Changes.
The American Recovery
and Reinvestment Act of 2009 (Recovery Act)[1] provides separate funding to the Treasury
Inspector General for Tax Administration through September 30, 2013, to be used
in oversight activities of Internal Revenue Service programs. This audit was conducted using Recovery Act
funds.
Management’s complete response to the draft report is included in Appendix V.
Copies of this report are also being sent to the IRS managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Michael E. McKenney, Assistant Inspector General for Audit (Returns Processing and Account Services), at (202) 622-5916.
Programming
Errors and Inaccurate Purchase Dates Resulted in Incorrect Notices
The Homebuyer
Credit Recapture File Was Incomplete
The Method Used
to Identify Individuals Who Disposed of Their Principal Residence Is Unreliable
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Outcome Measures
Appendix
V – Management’s Response to the Draft Report
Abbreviations
|
IDRS |
Integrated Data Retrieval System |
|
IRS |
Internal Revenue Service |
|
TIGTA |
Treasury Inspector General for Tax
Administration |
|
TY |
Tax Year |
The Internal Revenue Service (IRS) reported a total of $29.7
billion in Homebuyer Credit claims were made by more than 4 million individuals
as of May 7, 2011.
The Housing and Economic Recovery Act of 2008 (Housing Act)[2] introduced the new First-Time Homebuyer Credit (Homebuyer Credit) to help stimulate the housing industry by encouraging individuals to purchase their first homes. Subsequent legislation, the American Recovery and Reinvestment Act of 2009 (Recovery Act),[3] the Worker, Homeownership, and Business Assistance Act of 2009 (Assistance Act),[4] and the Homebuyer Assistance and Improvement Act of 2010 (Homebuyer Act),[5] revised, extended, and expanded the Homebuyer Credit in an attempt to remedy the struggling real estate market.
The Homebuyer Credit reduced taxes or increased tax refunds depending on the tax owed. The Homebuyer Credit was a refundable credit which resulted in a tax refund even if no income tax was withheld or paid when the credit exceeded the tax liability. Figure 1 provides a breakdown of Homebuyer Credit claims by Legislation.
Figure 1: Comparison of Homebuyer Credit Claims by
Legislation
Through May 7, 2011
|
Legislation |
Homebuyer Credit
Claims |
Amount of Homebuyer
Credit Claimed |
|
Housing
Act |
1,564,170 |
$10.8
billion |
|
Recovery
Act |
2,041,969 |
$13.8
billion |
|
Assistance
Act |
219,213 |
$1.6
billion |
|
Homebuyer
Act |
263,774 |
$3.5
billion |
|
Total |
4,089,126 |
$29.7 billion |
Source: The IRS
Submission Processing function.
The laws which provided
Homebuyer Credits contain different repayment and/or waiver of repayment requirements
Each of the laws with Homebuyer Credit
provisions contains different Credit amounts, qualification requirements, and
repayment requirements. For example, individuals
who received the Homebuyer Credit for a home purchased in 2008 are required to
make mandatory repayments of the Homebuyer Credit. These individuals are required to pay back
the total amount received for the Homebuyer Credit over 15 years. Annual repayment amounts are added to any other tax the individual
owes on their Federal tax return beginning in Tax Year (TY) 2010. This could result in an additional tax owed
or a reduced refund. There are
some exceptions.
Individuals who received the Homebuyer Credit generally must repay the entire Homebuyer Credit amount they received if, during the 3-year period beginning on the purchase date and after the year for which the individual received the Homebuyer Credit, they dispose of their home or it ceases to be their principal residence. Figure 2 provides a comparison of the repayment requirements and some of the repayment exceptions in the four Homebuyer Credit provisions.
Figure 2: Comparison of Homebuyer Credit Repayment
Provisions
|
|
Housing Act |
Recovery Act |
Assistance Act |
Homebuyer Act |
|
Homebuyer
Credit Repayment |
Repayment is over Repayment of the outstanding
Homebuyer Credit in the next tax year if the residence claimed for the Credit
ceases to be the principal residence before the end of the 15-year recapture
period (provided there is a gain on the sale of the home). |
Repayment of the Homebuyer
Credit in the next tax year if the residence claimed for the Credit is no
longer the principal residence within 3 years of purchase date (provided
there is a gain on the sale of the home). |
Repayment of the
Homebuyer Credit in the next tax year if the residence claimed for the Credit
is no longer the principal residence within 3 years of purchase date
(provided there is a gain on the sale of the home). |
No change from Assistance
Act. |
|
Waiver of Homebuyer Credit Repayment |
Death of the individual. |
Death of the individual. |
Death of the individual. Individuals (and spouses,
if married) on qualified extended duty. |
No change from Assistance Act. |
Source: Treasury
Inspector General for Tax Administration (TIGTA) analysis of legislation.
Individuals report Homebuyer Credit repayments and dispositions (may result in repayment of the Homebuyer Credit the following tax year) on Parts III and IV on the First-Time Homebuyer Credit and Repayment of the Credit (Form 5405). Figure 3 provides an example of Form 5405 Parts III and IV.
Figure 3: Form 5405, Parts III and IV
Figure 3 was removed due to its size. To see Figure 3, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Recovery Act
activities require a high level of scrutiny, and taxpayer dollars spent on
economic recovery must be subject to unprecedented levels of transparency and
accountability. Federal agencies are
required to ensure Recovery Act funds are used for authorized purposes and appropriate
measures are taken to prevent fraud, waste, and abuse. As such, the TIGTA is required to monitor the
IRS’s implementation of Recovery Act provisions, and this audit was conducted
to meet those requirements.
This review was performed at the Wage and Investment Division Headquarters in Atlanta, Georgia, during the period August 2010 through June 2011. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
The IRS is continuing to take actions
to develop and implement Homebuyer Credit repayment processes and
procedures. These actions include:
·
Notice
CP03a, Repaying your First-Time Homebuyer Credit - sent to individuals who purchased a home
in 2008 and are required to repay the credit over 15 years beginning in TY 2010. This notice will be sent to these individuals
annually until the Homebuyer Credit is fully repaid. The notice lists the amount of the Homebuyer
Credit the individual originally received and the amount still outstanding that
has to be repaid as an additional tax.
For the 2011 Filing Season, the IRS reported it issued 1,520,025 Notices
CP03a.
·
Notice
CP03b, Courtesy message about your First-Time Homebuyer Credit - sent to individuals for 3 years after the
year they received the Homebuyer Credit for a 2009 or 2010 purchase. This notice informs individuals what
to do if they sell their principal residence or if it is no longer their principal
residence. For the 2011 Filing Season, the IRS reported it issued 3,746,397
Notices CP03b.
·
Notice
CP03c, Important information regarding your First-Time Homebuyers Credit - sent
to individuals when the IRS has information that there was a change to the
individual’s principal residence. It
reminds individuals to file a Form 5405 to report the sale or disposition of
their principal residence and repay the credit.
For the 2011 Filing Season, the IRS reported it issued 86,609 Notices CP03c.
The IRS accurately issued more than 5.2
million Notices CP03a and CP03b. However,
our review identified that the IRS issued incorrect notices or did not send
notices to 61,427 (1 percent) individuals.
For example, because of programming errors, 13,327 individuals (including
deceased individuals) received incorrect notices and 18,220 individuals did not
receive their notice. In addition,
29,880 individuals received incorrect notices because the IRS’s computer system
showed incorrect home purchase dates.
In addition, our
review also identified that the IRS’s Recapture File sent to the third-party
vendor was not complete; 31,062 individuals who received the Homebuyer Credit
(through February 2010) were not included in this file. Finally, we identified that the methodology
used to identify individuals who
may have disposed of their principal residence was not reliable.
Programming Errors and Inaccurate Purchase Dates Resulted in Incorrect Notices
Our review identified that because of programming errors and inaccuracies
related to the year of purchase on the Homebuyer Credit Entity Section of tax
accounts, individuals did not receive notices or received incorrect notices.
Some
individuals did not receive Homebuyer Credit notices
Our review identified 18,220 individuals who received the Homebuyer Credit for a 2008 purchase but were not included in the IRS’s Notice CP03a issuance file. This resulted from a programming error in the IRS’s notice issuance process. Individuals who did not receive this notice may not be aware of their repayment requirements, including the amount of Homebuyer Credit which needs to be repaid for TY 2010.
On October 29, 2010, we alerted IRS management that not all appropriate individuals were going to receive the Notice CP03a. We recommended that the IRS correct its notice programming to ensure these 18,220 individuals receive a Notice CP03a. In its response, the IRS noted that it had corrected its notice programming and would issue a Notice CP03a to the individuals identified by the TIGTA. As recently as April 14, 2011, we were assured by IRS executives that these notices had been issued. However, our review of an updated Notice Issuance File, dated December 25, 2010, identified that the IRS did not issue a Notice CP03a to 17,638 (97 percent) of these 18,220 individuals.
Some individuals received or would have received Homebuyer Credit notices with incorrect repayment amounts
Our review identified 12,495 Notices CP03a that incorrectly showed the individual’s required repayment amount as $0 when in fact these individuals had a repayment obligation. On October 22, 2010, we alerted IRS management that notices had incorrect repayment amounts. The IRS responded that 8,609 notices with incorrect repayment amounts had already been mailed; however, corrected notices would be reissued to these individuals. The cost of issuing the 8,609 incorrect notices was approximately $29,701. In addition, the IRS responded it would halt the issuance of notices the week beginning October 24, 2010, to correct the programming error to ensure accurate repayment amounts were detailed on notices subsequently issued by the IRS.
As recently as April 14, 2011, we were assured by IRS executives that these notices had been issued with correct repayment amounts. However, our review of an updated Notice Issuance File, dated December 25, 2010, identified that the IRS did not issue correct notices to 3,472[6] (28 percent) of these 12,495 individuals.
Incorrect purchase dates resulted
in some individuals receiving incorrect Homebuyer Credit notices
Our review identified 29,880
individuals who received an incorrect Notice CP03a or Notice CP03b that cost the
IRS approximately $103,086 to issue.
·
27,728 individuals
incorrectly received a Notice CP03a indicating they had a repayment obligation
despite having purchased their home in 2009 (only 2008 purchases have a
repayment requirement). These
individuals should have received a Notice CP03b.
In a prior review,[7]
we alerted IRS management that, in some instances, the IRS did not accurately distinguish between individuals with a 2008 home
purchase date and those with a 2009 home purchase date. The prior review identified 68,924 individuals
who received the Homebuyer Credit that had incorrect purchase dates shown in
the Homebuyer Credit Entity Section of their accounts. We recommended that the Commissioner, Wage
and Investment Division, correct the purchase dates for these 68,924
accounts. The IRS agreed with this
recommendation. The IRS indicated that
it would use third-party property records to verify home purchase or
disposition information and would refer discrepancies for appropriate
resolution.
However, as we have previously described, the IRS has still not corrected all of these individuals’ purchase dates. As a result, these individuals received and will continue to receive incorrect notices. On November 22, 2010, we again notified IRS management that individuals’ accounts had incorrect purchase dates. IRS management responded they would systemically correct purchase dates in the Homebuyer Credit Entity Section of these accounts to reflect the correct year of the home purchase. The IRS further noted that it would filter to remove from this population any individual tax accounts with post-processing compliance actions present on the account and systemically correct the purchase dates by January 29, 2011.
Our review of the 29,880 tax accounts, as of February 26, 2011, still identified 2,535 tax accounts with an incorrect purchase date. In addition, the IRS did not issue corrected notices to the 29,880 individuals who received an incorrect notice.
Some deceased individuals would have incorrectly received a Homebuyer Credit notice
Our review identified 832 deceased individuals who would have incorrectly received a Homebuyer Credit notice. We determined that 832 of the 1,326 deceased individuals identified in a prior review[8] were still included in the IRS’s Notice CP03a and Notice CP03b issuance files. The law waives any repayment of the Homebuyer Credit for deceased individuals. These individuals should not receive Homebuyer Credit notices.
IRS guidelines require that when a tax return is filed on behalf of an individual who is recently deceased, the tax return must be appropriately notated so the individual’s tax account can be properly coded. However, we found that not all deceased individual tax accounts were properly coded to indicate the individual who received the Homebuyer Credit was now deceased.
On November 4, 2010, we alerted IRS management of the potential that Homebuyer Credit notices would be incorrectly sent to deceased individuals. The IRS responded that actions were taken to remove deceased individuals from the Homebuyer Credit Entity Section of the accounts. For Filing Season 2011, when final tax returns for deceased individuals are filed, a code will be input on the tax return that will result in an adjustment to the individual’s tax account which will waive any repayment of the Homebuyer Credit and ensure no notices are issued. For future processing, to remove deceased individuals from the Homebuyer Credit Entity Section, the IRS will use the Social Security Administration decedent data to systemically identify, suspend notices, and adjust these tax accounts. This future process will be performed bi-annually beginning July 2011.
As recently as April 14, 2011, we were assured by IRS executives that these notices had not been issued. However, our review of an updated Notice Issuance File, dated December 25, 2010, identified that the IRS failed to suppress the issuance of notices to 738 (89 percent) of the 832 deceased individuals. The cost of issuing the 738 notices was approximately $2,546.
Recommendations
The Commissioner, Wage and Investment Division, should:
Recommendation 1: Ensure notice issuance programming accurately identifies individuals who should receive a Notice CP03a or CP03b and ensure information contained in these notices is accurate.
Management’s Response: In response to our recommendation, the IRS stated it is discontinuing the use of Notices CP03a and CP03b and replacing them with a web-based tool that will be available to taxpayers for the 2012 Filing Season. The IRS is publicizing the availability of the tool to tax software and return preparer communities and will conduct additional outreach to inform taxpayers for the filing season.
Recommendation 2: Correct the
purchase dates for the 2,535 tax accounts we identified as still having an incorrect
purchase date recorded on their Homebuyer Credit Entity Section on the IRS’s
computer system.
Management’s Response: IRS management agreed with this recommendation; however, their preliminary reviews indicate that a high percentage of these accounts appear to be correct. Purchase dates have been updated from the original return values by subsequent examination or adjustment activity on the tax return. These accounts have been referred to the Accounts Management function, which is analyzing the accounts and making necessary corrections.
The Homebuyer Credit Recapture File Was Incomplete
We identified 31,062 individuals who received the Homebuyer Credit as of February 2010, that were not included in the IRS’s Recapture File. The Recapture File was sent to a third-party vendor for research to identify potential dispositions of an individual’s principal residence. On January 19, 2011, we alerted IRS management that the Recapture File was incomplete. IRS management responded that they were aware that the Recapture File was incomplete and had previously notified the TIGTA there were secondary tax accounts[9] of individuals who filed jointly with their spouse that were not included. The IRS noted that these individuals were not included because of programming issues and would be included in the next Recapture File.
The IRS had informed us there were a few thousand individuals who would not be included in the Recapture File because of the reasons previously stated. We acknowledge that some of the individuals not included in the file were the result of secondary tax accounts. This does not, however, account for all of the 31,062 individuals we identified that were not included in the Recapture File. We raised this concern in discussions with the IRS and were provided a subsequent response dated April 21, 2011. In this response, the IRS indicated that the methodology it used to populate the Recapture File differed from the TIGTA’s methodology, which resulted in the file being incomplete. The difference is that the IRS’s methodology limited inclusion of individuals in the Recapture File to only those individuals who both had received the Homebuyer Credit and had their TY 2009 U.S. Individual Income Tax Return (Form 1040) processed by February 2010. We believe the 31,062 individuals who we identified should have been included in the Recapture File. The IRS has informed us that the individuals we identified will be included in the next IRS Recapture File scheduled for June 2011.
The Method Used to Identify Individuals Who Disposed of Their Principal Residence Is Unreliable
Our review found that the method used to identify individuals who disposed of their principal residence is not reliable. The research performed by the third-party vendor incorrectly identified current addresses. Because of this, some individuals incorrectly received a Notice CP03c, which is sent to individuals when the IRS has information that there was a change to the individual’s principal residence. For the 86,609 individuals who received a Notice CP03c, 53,558 (62 percent) received this notice because the third-party vendor incorrectly indicated the individual’s address did not match the individual’s address in the IRS’s Recapture File.
Based on our identification of the inaccurate and incomplete results provided by the third-party vendor, we recommend that the IRS discontinue using a vendor to identify individuals who may have disposed of their principal residence. In fact, tax records the IRS maintains seem to be more reliable in identifying individuals who disposed of their principal residence.
Third-party address research is resulting in the incorrect identification of individuals who disposed of their principal residence
Our statistically valid sample of 97 individuals included in the IRS’s Recapture File included 8 individuals who received a Notice CP03c based on third-party research indicating these individuals may have disposed of their principal residence. The third-party vendor indicated these eight individuals’ current address did not match the individual’s address that was provided in the IRS’s Recapture File.
However, our review of IRS information and information provided by the third-party vendor identified that these individuals incorrectly received a Notice CP03c. The information showed that the individuals’ principal residence was still the address provided by the IRS in its Recapture File. The IRS requested that the third-party vendor research third-party data including public property records (e.g., tax assessor, deed) and provide back to the IRS information indicating whether the individual has a different address than the address provided by the IRS. For each of these eight individuals, the third-party vendor provided back that the individual had a different current address. However, our research of IRS records and current tax assessor and deed records showed that these individuals lived at the principal residence address that was included in the IRS’s Recapture File. Our discussions with the third-party vendor found that the method it used to identify a different address for these eight individuals incorrectly identified the current address based on what they indicated was the presence of an active landline telephone number. This is despite third-party property records showing that the individual resided at the address included in the IRS’s Recapture File.
Figure 4 shows that the principal residence address provided by the third-party vendor was not included in any IRS tax records or tax assessor and deed records.
Figure 4: Comparison of Current Address Provided by
Third-Party
Vendor to Address on Tax Returns and Property Records
|
|
Does the
Individual’s Current Address From the Third-Party Vendor Match the
Individual’s Address on: |
||||
|
Individual |
2008 Tax Return |
2009 Tax Return |
2010 Tax Return |
Current Tax Assessor Record |
Current Deed Record |
|
1 |
**1** |
**1** |
**1** |
**1** |
**1** |
|
2 |
**1** |
**1** |
**1** |
**1** |
**1** |
|
3 |
**1** |
**1** |
**1** |
**1** |
**1** |
|
4 |
**1** |
**1** |
**1** |
**1** |
**1** |
|
5 |
**1** |
**1** |
**1** |
**1** |
**1** |
|
6 |
**1** |
**1** |
**1** |
**1** |
**1** |
|
7 |
**1** |
**1** |
**1** |
**1** |
**1** |
|
8 |
**1** |
**1** |
**1** |
**1** |
**1** |
Sources: Current
address data provided by third-party vendor, the IRS’s Individual Income Tax
data,
and the third-party vendor’s system of property records (e.g., tax assessor and
deed records).
Information provided to the IRS from the third-party vendor was incomplete and/or inaccurate
Our review of the third-party vendor’s research results for
a statistically valid sample of
97 taxpayer accounts determined that for 40 (41 percent) of the taxpayer
accounts, the information provided to the IRS had incomplete or inaccurate
information.
We identified the 40 taxpayer accounts with incomplete or inaccurate information by researching the taxpayers’ address information, tax assessor records, and deed records maintained on the third-party vendor’s database of public records, and comparing our research results to the information provided by the third-party vendor to the IRS. The incomplete or inaccurate information could result in the IRS erroneously mailing a Notice CP03c to individuals who did not dispose of their principal residence, or failing to mail a Notice CP03c to individuals who disposed of their principal residence.
Information maintained in IRS records provides more reliable identification of individuals potentially disposing of their principal residence
Based on our identification of the inaccurate and incomplete results provided by the third-party vendor, we recommend that the IRS discontinue using a third-party vendor to identify individuals who may have disposed of their principal residence. In our opinion, tax records and information that the IRS maintains is more reliable in identifying individuals who disposed of their principal residence.
Pie chart of Taxpayers
who received a Notice of CP03c and filed a TY 2010 return was removed due to
its size. To see the pie
chart, please go to the Adobe PDF version of the report on the TIGTA Public Web
Page.
As of April 27, 2011, the third-party vendor had not billed the IRS for its research results, but the IRS informed us the amount due the third party was approximately $214,000. Further indication that the research provided by the third-party vendor was not reliable is that only 3,306 (6 percent) of the 57,842 individuals who received a Notice CP03c and who filed a TY 2010 tax return as of April 23, 2011, reported a disposition.
Even though IRS management knew that third-party information was inaccurate, a decision was made to mail Notices CP03c
The IRS informed us
that it received the third-party vendor results in November 2010. The IRS’s review of the results identified that
the information provided contained “minor errors that impacted a relatively
small number of records.”
When the third-party
vendor could not deliver improved results by mid-December 2010, the IRS decided
to use the November 2010 results to identify individuals who should receive a Notice
CP03c. The IRS believed it was critical
to mail the Notice CP03c to individuals prior to the 2011 Filing Season to
alert the individuals that they might need to report the disposition. See Figure 5 for a timeline on the providing
of results to the IRS from the third-party vendor.
Figure 5: Timeline for Receiving Third-Party Research
Data
|
Date |
Action |
|
June – July 2010 |
Test sample of 5,000 records provided by
the IRS to the third-party vendor. The
purpose of providing the test sample was to identify and correct programming
errors in the third-party vendor’s research program. |
|
July 2010 |
The IRS’s Recapture File was provided to
the third-party vendor to conduct research. |
|
August 2010 |
The IRS received the preliminary research
results from the third-party vendor. The
IRS’s quality review of the information identified errors. |
|
August – |
Results were provided to the IRS from the third-party
vendor for evaluation. Based on the IRS’s
evaluation, programming changes were performed. |
|
November – December 2010 |
The IRS received a file from the third-party
vendor containing what the IRS referred to as “minor errors.” The file contained minor errors that affected
a relatively small number of records and were considered when the IRS used
the third-party vendor’s research results to identify individuals with a
potential disposition. The IRS
notified the vendor of the errors and requested a revised file with corrected
information. |
|
December 2010 |
The IRS believed that it was crucial to
mail Notice CP03c prior to the |
|
January 2011 |
The IRS mailed Notice CP03c to 86,609
individuals. |
|
January – |
The IRS requested the third-party vendor to
take the following actions to correct the information:
|
|
February 22, 2011 |
The third-party vendor was still conducting
a quality review of its programming. The
vendor estimated sending the IRS final results for individuals included in
the IRS’s July 2010 Recapture File by |
Source: The IRS Electronic Tax Administration and
Refundable Credits function.
Our review of email correspondence between the IRS and the
third-party vendor showed the problems with the third-party vendor research
provided to the IRS and the IRS’s concerns regarding these data. Emails from IRS employees responsible for
reviewing the third-party data raised concerns regarding the completeness and
accuracy of the information provided to the IRS. These concerns noted that records seemed to
be inaccurate, data were missing in the files delivered, and information
provided did not match information on the third-party vendor web site database
that can be researched by the IRS. These
concerns were being raised as late as November 2010, yet IRS management went
forward with the decision to mail notices to individuals based on the known
inaccurate and incomplete data. We
believe the IRS should not have issued these notices using the information
provided by the third-party vendor.
Recommendation
Recommendation 3: The Commissioner, Wage and Investment Division, should discontinue using third-party vendor data to identify individuals who may have disposed of their principal residence unless the reliability can be significantly improved. The IRS should develop a methodology that uses the IRS’s tax return data and information to identify individuals who have an indication of a disposition of their principal residence.
Management’s Response: IRS management agreed with this recommendation. The IRS will complete its evaluation of the use of the third-party vendor data and reevaluate the use of its own internal data which was considered when its First-Time Homebuyer Credit Recapture Strategy was first developed.
Appendix I
Detailed Objective, Scope, and Methodology
Our overall objective was to evaluate the effectiveness of IRS processes to ensure the accurate and timely repayment of the First-Time Homebuyer Credit (Homebuyer Credit) including individuals who do not self-identify a disposition of their primary residence. To accomplish this objective, we:
I. Assessed the completeness and accuracy of the IRS’s Recapture File.
A. Interviewed responsible IRS officials to determine how the IRS’s Recapture File was created and the criteria used to identify the individual tax accounts to be included in the Recapture File.
B. Created a duplicate (TIGTA) Recapture File based on the criteria used by the IRS and matched it to the IRS’s Recapture File to see if the data in both files were the same.
C. Validated 40 records in the IRS’s Recapture File against taxpayer data on the IRS’s Integrated Data Retrieval System (IDRS).[11] We validated 36 records in TIGTA’s Recapture File against taxpayer data on the IDRS.
II. Assessed the IRS’s development and accuracy of Notice CP03a, Repaying your First-Time Homebuyer Credit, and Notice CP03b, Courtesy message about your First-Time Homebuyer Credit.
A. Reviewed the process to ensure individuals who claimed the Homebuyer Credit for Calendar Year 2008 home purchases received the proper notification (Notice CP03a).
1. Interviewed responsible IRS officials to determine how the individuals requiring notification are being identified.
2. Obtained the IRS’s file of Notices CP03a and CP03b through September 25, 2010, and validated five records in the notice file against the IDRS.
3. Obtained an extract of the Individual Master File[12] Homebuyer Credit Entity Section data through October 2, 2010, from TIGTA’s Information Services staff. We validated five records in the extract against the IDRS.
4. Compared the records on the Homebuyer Credit Entity Section to the records on the file of Notices CP03a and CP03b.
a. Identified individuals not included in the notice file for issuance of the Notice CP03a and determined the effect on individuals and the IRS.
b. Assessed the accuracy of the amounts reported on the Notices CP03a.
c. Identified individuals not included in the notice file for issuance of the Notice CP03b and determined the effect on individuals and the IRS.
B. Followed up on management’s corrective actions in response to the findings contained in the most recent TIGTA report on the Homebuyer Credit.[13]
1. Determined if the IRS sent Notice CP03b to 49,480 individuals who purchased a home in 2009, but the IRS incorrectly recorded the purchase date as 2008 on the individuals’ Homebuyer Credit Entity Section.
2. Determined if the IRS sent Notice CP03a to the 6,541 individuals who purchased a home in 2008, but the IRS incorrectly recorded the purchase date as 2009 on the individuals’ Homebuyer Credit Entity Section.
3. Determined if the IRS excluded the 1,326 deceased individuals from its file of CP03a and CP03b notices.
C. Obtained the IRS’s revised file of Notices CP03a and CP03b through December 25, 2010, and analyzed the file to determine if it contained corrected notices for the issues identified in our review.
III. Evaluated the effectiveness of the IRS’s use of a third-party vendor to identify individuals who do not self-report a disposition of their primary residence.
A. Interviewed the third-party vendor for background information about its database of public records and how the taxpayer’s current address was identified.
B. Obtained the third-party vendor’s research results for the IRS’s Recapture File.
C. Researched
IRS data and the third-party vendor’s database of public records for a
statistical sample of 97 records from the third-party research results. Our sample size was determined using the
following sampling criteria:
1,762,353 population
(e.g., number of records in the IRS’s Recapture File).
90 percent confidence level.
10 percent actual error rate (based
on the review of 10 records).
±5 percent precision.
D. Matched the 97 sample records against the IRS’s Notice CP03c file to determine how many taxpayers in the sample were issued Notice CP03c.
E. Matched the third-party vendor’s research results for the IRS’s Recapture File against the IRS’s Notice CP03c file to identify individuals receiving a Notice CP03c solely because the third-party vendor’s results showed the individuals do not reside at the addresses included in the IRS’s Recapture File.
F. Matched the individuals who received a Notice CP03c against TY 2010 returns processed through April 23, 2011, to identify individuals who did not report a disposition on First-Time Homebuyer Credit and Repayment of the Credit (Form 5405).
Internal controls methodology
Internal controls relate to management’s
plans, methods, and procedures used to meet their mission, goals, and
objectives. Internal controls include
the processes and procedures for planning, organizing, directing, and
controlling program operations. They
include the systems for measuring, reporting, and monitoring program
performance. We determined the following
internal controls were relevant to our audit objective: IRS Wage and Investment Division’s policies,
procedures, and practices for developing and implementing the First-Time
Homebuyer Credit Recapture Strategy. We
evaluated these controls by interviewing IRS management and third-party vendor
personnel, reviewing documentation, analyzing IRS Notices CP03a, CP03b, and
CP03c, and analyzing IRS data and public records for taxpayers who received the
Homebuyer Credit.
Appendix II
Major Contributors to This Report
Michael E. McKenney, Assistant Inspector General for Audit (Returns Processing and Account Services)
Russell Martin, Director
Tina Parmer, Audit Manager
Sharon Buford, Lead Auditor
Karen Fulte, Senior Auditor
Van Warmke, Senior Auditor
Denise Gladson, Auditor
Lance Welling, Auditor
Martha Stewart, Senior Information Technology
Specialist
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Operations Support OS
Deputy Commissioner for Services and Enforcement SE
Deputy Commissioner, Wage and Investment Division SE:W
Chief Technology Officer OS:CTO
Director, Compliance, Wage and Investment Division SE:W:CP
Director, Electronic Tax Administration and
Refundable Credits, Wage and Investment Division SE:W:ETARC
Director, Strategy and Finance, Wage and Investment Division SE:W:S
Director, Reporting Compliance, Wage and Investment Division SE:W:CP:RC
Director, Submission Processing OS:CTO:AD:SP
Director, Submission Processing, Wage and Investment
Division SE:W:CAS:SP
Chief, Program Evaluation and Improvement, Wage and Investment Division SE:W:S:PEI
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaisons:
Senior Operations Advisor, Wage and Investment Division SE:W:S
Chief, Program Evaluation and Improvement, Wage and Investment Division SE:W:S:PEI
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to Congress.
Type and Value of Outcome Measure:
· Taxpayer Burden – Potential; 18,220 taxpayers received the First-Time Homebuyer Credit (Homebuyer Credit) for a 2008 home purchase but were not included in the IRS’s Notice CP03a issuance file (see page 6).
Methodology Used to Measure the Reported Benefit:
Our review identified 18,220 taxpayers who received the Homebuyer Credit for a 2008 purchase but were not included in the IRS’s Notice CP03a issuance file. As a result, these taxpayers would not receive the Notice CP03a showing the amount of the credit the taxpayer would have to repay as additional tax for TY 2010. The 18,220 is the sum of 17,246 + 292 + 682 taxpayers.
To identify the 18,220 taxpayers, we obtained an extract of the Homebuyer Credit Entity Section for taxpayers claiming the credit through October 2, 2010, from TIGTA’s Information Services staff. We used computer analysis to identify 1,065,465 primary taxpayers and 478,468 secondary taxpayers with a 2008 home purchase year. We also obtained an IRS file of Notices CP03a and CP03b as of September 25, 2010, and used computer analysis to identify 1,506,259 Notices CP03a.
We matched the taxpayers with a 2008 home purchase year against the Notices CP03a and identified 10,552 primary and 21,038 secondary taxpayers who did not have a Notice CP03a. We eliminated 9,466 primary and 2,131 secondary taxpayers who had a deceased indicator, a credit amount of $0, or a recapture amount that equaled the credit amount because a Notice CP03a would not be issued to taxpayers with these conditions. There were 1,086 primary and 18,907 secondary taxpayers remaining after these eliminations.
We used TIGTA’s Data Center Warehouse to extract a file of taxpayers who received the Homebuyer Credit [14] for TY 2008 or TY 2009. We matched the Data Center Warehouse extract against the 18,907 secondary taxpayers and eliminated 1,661 secondary taxpayers who received the credit, or had an adjustment that changed a 2009 purchase to a 2008 purchase, after the IRS’s notice file was created (September 25, 2010). The result was 17,246 taxpayers who filed as a secondary taxpayer on TY 2008 returns and claimed the Homebuyer Credit but no Notices CP03a were issued to them. We also determined that 292 of the taxpayers filed as a primary taxpayer on TY 2008 returns and claimed the Homebuyer Credit but no CP03a notices were issued to them.
We matched the Data Center Warehouse file against the 1,086 primary taxpayers and eliminated 404 primary taxpayers who received the credit, or had an adjustment that changed a 2009 purchase to a 2008 purchase, after the IRS’s notice file was created (September 25, 2010). The result was 682 taxpayers who filed as primary taxpayers on TY 2008 returns and claimed the Homebuyer Credit but no Notices CP03a were issued to them.
Type and Value of Outcome Measure:
· Taxpayer Burden – Potential; 12,495 taxpayers received or would have received Notices CP03a that incorrectly showed the taxpayer’s required repayment amount as $0 when in fact these taxpayers had a repayment obligation (see page 6).
Methodology Used to Measure the Reported Benefit:
Our review identified 12,495 Notices CP03a that incorrectly showed the taxpayer’s required repayment as $0 when in fact these taxpayers had a repayment obligation. This occurred on records where the primary taxpayer on the Homebuyer Credit Entity Section did not have a credit, but the secondary taxpayer on the Homebuyer Credit Entity Section did.
To identify the 12,495 taxpayers, we obtained an extract of the Homebuyer Credit Entity Section for taxpayers claiming the credit through October 2, 2010, from TIGTA’s Information Services staff. We used computer analysis to identify 478,468 secondary taxpayers with a 2008 home purchase year. We eliminated 1,744 secondary taxpayers who had a $0 credit amount. For the remaining 476,724 secondary taxpayers, we computed the annual repayment amount.[15]
We obtained an IRS file of Notices CP03a and CP03b as of September 25, 2010, and used computer analysis to identify 1,506,259 Notices CP03a. We matched the 476,724 secondary taxpayers against the Notices CP03a and identified 457,545 secondary taxpayers.
For the 457,545 secondary taxpayers, we compared the annual repayment amount that we computed using the Homebuyer Credit Entity Section data to the amount of credit to be repaid on the Notice CP03a. We identified 12,495 secondary taxpayers with an incorrect repayment amount of $0 on Notice CP03a. In its response to our email alert, the IRS informed us that incorrect notices had been mailed to 8,609 taxpayers.
Type and Value of Outcome Measure:
· Taxpayer Burden – Potential; 738 taxpayers who were identified as deceased; however, the IRS failed to suppress the issuance of notices to these taxpayers (see page 6).
Methodology Used to Measure the Reported Benefit:
Our review of an updated Notice Issuance File, dated December 25, 2010, identified that the IRS failed to suppress the issuance of notices to 738 of 1,326 deceased taxpayers identified in a prior review.[16]
Type and Value of Outcome Measure:
· Inefficient Use of Resources – Potential; $135,333 cost of issuing 39,227 incorrect notices (see page 6).
Methodology Used to Measure the Reported Benefit:
The 39,227 is the sum of:
We used the IRS’s Fiscal Year 2010 cost estimate reference for the Notice Review function to calculate the cost of issuing the 39,227 incorrect notices. The Notice Review total cost estimate for 1,000 notices is $3,451. The unit cost is $3.45 ($3,451 divided by 1,000). We multiplied the $3.45 unit cost by the 39,227 incorrect notices for a total cost estimate of $135,333.
Appendix V
Management’s Response to the Draft Report
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE
SERVICE
ATLANTA. GA 30308
COMMISSIONER
WAGE AND INVESTMENT DIVISION
August 11, 2011
MEMORANDUM FOR MICHAEL R. PHILLIPS
DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: for Richard Byrd, Jr. /s/Peggy Bogadi
Commissioner, Wage and Investment
Division
SUBJECT: Draft
Audit Report – First-Time Homebuyer Credit Repayment Notices Were Incorrect,
and the Method Used to Identify Dispositions Is Unreliable (Audit # 201040107)
We have reviewed the subject draft audit report evaluating
the effectiveness of the IRS processes to ensure the accurate and timely
repayment of the First-Time Homebuyer Credit (FTHBC). As reflected in the report, the FTHBC posed
administration challenges in that it was amended by three subsequent
legislative provisions which changed the nature of the credit from a $7,500
interest-free loan intended to assist qualifying individuals with the purchase
of a home, to an $8,000 credit that, generally, does not require repayment. The legislation does, however, include
recapture provisions which will accelerate repayment of the $7,500 if the
taxpayer(s) dispose of the home, or it ceases to be the primary residence prior
to the end of the fifteen-year repayment period. The $8,000 credit is subject to repayment if
a disposition occurs, or the home ceases to be the primary residence within
three years of the date of purchase. The
scope of the FTHBC was unprecedented in that it required the development of a
comprehensive and balanced strategy to administer the credit among the many
unique situations that could trigger the recapture provisions, and to provide
information to affected taxpayers to assist them in complying with their tax
reporting obligations.
In developing our administrative plan, we considered
sources of data available that would assist us in identifying taxpayers who
might be subject to the recapture provisions.
We considered internal data, such as updated address information when
taxpayers file tax returns with a different address than was used the previous
year and data provided on information returns from third-party reporters. We also considered and, eventually, decided
on using county property records obtained from a third-party vendor because it
was believed those records would provide the timeliest information to be used
in identifying potential dispositions.
Our education outreach efforts included, in part, the revision of forms
and publications that addressed the provisions of the credit; posting
information on our web site, IRS.gov; public service announcements; and,
outreach efforts to taxpayers and the professional preparer communities. We also initiated a program that proactively
focused educational activities on those taxpayers whom we identified as
claiming the credit by sending them informational notices to inform them of the
repayment and recapture provisions of the FTHBC. Through the notice program, we reached out to
5.2 million affected taxpayers and, despite some data and programming errors in
this initial effort, achieved a 99 percent accuracy rate in providing correct
information to affected individuals.
Based on feedback obtained from the IRS Advisory Council,
the tax preparer and software developer communities, and other various sources,
we will be altering our strategy by discontinuing the use of Computer Paragraph
(CP) Notices CP03a, Repaying Your
First-Time Homebuyer Credit. We have
determined a more cost-effective approach will be to provide a web-based
utility on IRS.gov that will assist taxpayers in determining if they have a
repayment or recapture requirement. This
tool will be available to the public for the upcoming 2012 Filing Season.
For future implementation, a second part of our strategy is
to review the returns of those taxpayers identified as having a disposition,
who neglected to report the disposition on their return. We are completing our evaluation of the use
of the third party vendor data and will consider the use of available internal
data to address this group of taxpayers.
Our comments to your
recommendations are attached. If you
have any questions, please contact me, or a member of your staff may contact Robin
L. Canady, Director, Strategy and Finance, Wage and Investment Division at
(404) 338-8801.
Attachment
Attachment
The Commissioner, Wage and
Investment Division, should:
RECOMMENDATION 1:
Ensure
notice issuance programming accurately identifies individuals who should
receive a Notice CP03a or CP03b and ensure information contained in these
notices is accurate.
CORRECTIVE ACTION:
We are
discontinuing the use of Computer Paragraph Notices CP03a, Repaying Your First-Time Homebuyer Credit and CP03b, Courtesy message about your First-Time Homebuyer Credit, and
replacing them with a web-based tool that will be available to taxpayers for
the 2012 Filing Season. We are publicizing the availability of the
tool to the tax software and return preparer communities, and will conduct
additional outreach to inform taxpayers for the Filing Season.
Implementation Date:
N/A
Responsible Official:
N/A
Corrective Action Monitoring Plan
N/A
RECOMMENDATION 2:
Correct the purchase dates for
the 2,535 tax accounts we identified as still having an incorrect purchase date
recorded on their Homebuyer Credit Entity Section on the IRS’s computer system.
CORRECTIVE ACTION:
We
agree with this recommendation; however, our preliminary reviews indicate that
a high percentage of these accounts appear to be correct. Purchase dates have been updated from the
original return values by subsequent examination or adjustment activity on the
tax return. These accounts have been
referred to our Accounts Management function, which is analyzing the accounts
and making necessary corrections.
Implementation Date:
December
15, 2011
Responsible Official:
Director, Accounts Management,
Wage and Investment Division
Corrective Action Monitoring Plan
The IRS will monitor this
corrective action as part of our internal management control.
RECOMMENDATION 3:
The Commissioner, Wage and Investment Division, should
discontinue using third-party vendor data to identify individuals who may have
disposed of their principal residence unless the reliability can be
significantly improved. The IRS should
develop a methodology that uses the IRS’s tax return data and information to
identify individuals who have an indication of a disposition of their principal
residence.
CORRECTIVE ACTION:
We
agree with this recommendation. We will
complete our evaluation of the use of the third-party vendor data and
re-evaluate the use of our own internal data which was considered when our
recapture strategy was first developed.
Implementation Date:
September 15, 2012
Responsible Official:
Director, Earned Income Tax
Credit, Wage and Investment Division
Corrective Action Monitoring Plan
The IRS will monitor this
corrective action as part of our internal management control.
[1] Pub. L. No. 111-5, 123 Stat. 115 (2009).
[2] Pub. L. No. 110-289, 122 Stat. 2654 (2008).
[3] Pub. L. No. 111-5, 123 Stat. 115 (2009).
[4] Pub. L. No. 111-92, 123 Stat. 2984 (2009).
[5] Pub. L. No. 111-198, 124 Stat. 1356 (2010).
[6] The 3,472 individuals who did not receive correct notices could be included in the 8,609 individuals who already received an incorrect notice and in the 3,886 individuals who had not been mailed a notice at the time we alerted the IRS.
[7] A Comprehensive Strategy Is Being Developed to Identify Individuals With First-Time Homebuyer Credit Repayment Requirements (Reference Number 2010-41-086, dated August 16, 2010).
[8] A Comprehensive Strategy Is Being Developed to Identify Individuals With First-Time Homebuyer Credit Repayment Requirements (Reference Number 2010-41-086, dated August 16, 2010).
[9] A taxpayer account can include one individual (e.g., an individual files a tax return using the “single” filing status) or two individuals (e.g., two people file a tax return using the “married filing joint” filing status). The IRS refers to the first person on a joint return as the “primary taxpayer” and the second person on a joint return as the “secondary taxpayer.”
[10] The IRS issued Notice CP03c to eight individuals on six of the eight taxpayer accounts.
[11] IRS computer system capable of retrieving or updating stored information. It works in conjunction with a taxpayer’s account records.
[12] The IRS database that maintains transactions or records of individual tax accounts.
[13] A Comprehensive Strategy Is Being Developed to Identify Individuals With First-Time Homebuyer Credit Repayment Requirements (Reference Number 2010-41-086, dated August 16, 2010).
[14] We used the Individual Master File and Other Modules Transactions Table on the TIGTA’s Data Center Warehouse to extract records with Transaction Code 766 and Credit Reference Number 258, which are used to allow the Homebuyer Credit on a taxpayer’s account.
[15] The annual repayment amount is the credit amount shown on the individual’s Homebuyer Credit Entity Section divided by 15.
[16] A Comprehensive Strategy Is Being Developed to Identify Individuals With First-Time Homebuyer Credit Repayment Requirements (Reference Number 2010-41-086, dated August 16, 2010).