TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

 

 

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 Serviceís (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 IRSís 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 individualís 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 individualís address did not match the address in the IRSís Recapture File.

Finally, our review of the third-party vendorís 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 IRSís 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 Ė 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.

Managementís 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.

 

 

Table of Contents

 

Background

Results of Review

Programming Errors and Inaccurate Purchase Dates Resulted in Incorrect Notices

Recommendations 1 and 2:

The Homebuyer Credit Recapture File Was Incomplete

The Method Used to Identify Individuals Who Disposed of Their Principal Residence Is Unreliable

Recommendation 3:

Appendices

Appendix I Ė Detailed Objective, Scope, and Methodology

Appendix II Ė Major Contributors to This Report

Appendix III Ė Report Distribution List

Appendix IV Ė Outcome Measures

Appendix V Ė Managementís 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

 

 

Background

 

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
15 years beginning in
TY 2010.

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 IRSís 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.

 

Results of Review

 

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 individualís 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 IRSís computer system showed incorrect home purchase dates.

In addition, our review also identified that the IRSís 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 IRSís Notice CP03a issuance file.This resulted from a programming error in the IRSís 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 individualís 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 individualsí 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 individualsí 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 IRSís 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 individualís 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 individualís 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.

Managementís 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 IRSís computer system.

Managementís 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 IRSís Recapture File.The Recapture File was sent to a third-party vendor for research to identify potential dispositions of an individualís 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 TIGTAís methodology, which resulted in the file being incomplete.The difference is that the IRSís 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 individualís 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 individualís address did not match the individualís address in the IRSís 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 IRSís 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 individualsí current address did not match the individualís address that was provided in the IRSís 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 individualsí 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 IRSís 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 IRSís 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 Individualís Current Address From the Third-Party Vendor Match the Individualís 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 IRSís Individual Income Tax data,
and the third-party vendorís 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 vendorís 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 taxpayersí address information, tax assessor records, and deed records maintained on the third-party vendorís 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 IRSís review of the results identified that the information provided contained ďminor errors that impacted a relatively small number of records.Ē

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 Ė 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 vendorís research program.

July 2010

The IRSís 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 IRSís quality review of the information identified errors.

August Ė
November 2010

Results were provided to the IRS from the third-party vendor for evaluation.Based on the IRSís evaluation, programming changes were performed.†††

November Ė December 2010

The IRS received a file from the third-party vendor containing what the IRS referred to as ďminor errors.Ē The file contained minor errors that affected a relatively small number of records and were considered when the IRS used the third-party vendorís 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
2011 Filing Season.When the third-party vendor could not deliver revised results by mid-December 2010, the IRS decided to use the November 2010 third-party research results for purposes of mailing the Notices CP03c.

January 2011

The IRS mailed Notice CP03c to 86,609 individuals.

January Ė
February 2011

The IRS requested the third-party vendor to take the following actions to correct the information:

  • Revise programming to provide the IRS with the two most current sales or foreclosure deed for the property of interest.
  • Revise programming to provide the IRS with the most current tax assessor property record.

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 IRSís July 2010 Recapture File by
March 4, 2011.

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 IRSís 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 IRSís tax return data and information to identify individuals who have an indication of a disposition of their principal residence.

Managementís 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 IRSís Recapture File.

A.    Interviewed responsible IRS officials to determine how the IRSís 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 IRSís Recapture File to see if the data in both files were the same.

C.     Validated 40 records in the IRSís Recapture File against taxpayer data on the IRSís Integrated Data Retrieval System (IDRS).[11]We validated 36 records in TIGTAís Recapture File against taxpayer data on the IDRS.

II.                Assessed the IRSís 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 IRSís 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 TIGTAís 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 managementís 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 individualsí 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 individualsí 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 IRSís 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 IRSís 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 taxpayerís current address was identified.

B.     Obtained the third-party vendorís research results for the IRSís Recapture File.

C.     Researched IRS data and the third-party vendorís 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 IRSís Recapture File).
††††† 90 percent confidence level.
††††† 10 percent actual error rate (based on the review of 10 records).
††††† Ī5 percent precision.

D.    Matched the 97 sample records against the IRSís Notice CP03c file to determine how many taxpayers in the sample were issued Notice CP03c.

E.     Matched the third-party vendorís research results for the IRSís Recapture File against the IRSís Notice CP03c file to identify individuals receiving a Notice CP03c solely because the third-party vendorís results showed the individuals do not reside at the addresses included in the IRSís 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 managementís 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 Divisionís 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

 

Report Distribution List

 

CommissionerC

Office of the Commissioner Ė Attn:Chief of StaffC

Deputy Commissioner for Operations SupportOS

Deputy Commissioner for Services and EnforcementSE

Deputy Commissioner, Wage and Investment DivisionSE:W

Chief Technology OfficerOS:CTO

Director, Compliance, Wage and Investment DivisionSE:W:CP

Director, Electronic Tax Administration and Refundable Credits, Wage and Investment DivisionSE:W:ETARC

Director, Strategy and Finance, Wage and Investment DivisionSE:W:S

Director, Reporting Compliance, Wage and Investment DivisionSE:W:CP:RC

Director, Submission ProcessingOS:CTO:AD:SP

Director, Submission Processing, Wage and Investment DivisionSE:W:CAS:SP

Chief, Program Evaluation and Improvement, Wage and Investment DivisionSE:W:S:PEI

Chief CounselCC

National Taxpayer AdvocateTA

Director, Office of Legislative AffairsCL:LA

Director, Office of Program Evaluation and Risk AnalysisRAS:O

Office of Internal ControlOS:CFO:CPIC:IC

Audit Liaisons:

Senior Operations Advisor, Wage and Investment DivisionSE:W:S

Chief, Program Evaluation and Improvement, Wage and Investment DivisionSE:W:S:PEI

 

Appendix IV

 

Outcome Measures

 

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 Ė Potential; 18,220 taxpayers received the First-Time Homebuyer Credit (Homebuyer Credit) for a 2008 home purchase but were not included in the IRSís 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 IRSís 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 TIGTAís 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 TIGTAís 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 IRSís 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 IRSís 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 Ė Potential; 12,495 taxpayers received or would have received Notices CP03a that incorrectly showed the taxpayerís 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 taxpayerís 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 TIGTAís 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 Ė 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 Ė 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 IRSís 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

 

Managementís 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 Ė 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 IRSís 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 IRSís 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 ďsingleĒ filing status) or two individuals (e.g., two people file a tax return using the ďmarried filing jointĒ filing status).The IRS refers to the first person on a joint return as the ďprimary taxpayerĒ and the second person on a joint return as the ďsecondary taxpayer.Ē

[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 taxpayerís 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 TIGTAís 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 taxpayerís account.

[15] The annual repayment amount is the credit amount shown on the individualís 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).