Treasury Identifies Confusion in IRS Handling of Homebuyer Tax Credits

by devteam September 10th, 2010 | Share

The Treasury Inspector Generalrnfor Tax Administration (TIGTA) has completed a study of IRS management of thernevolving series of tax credits that were offered to homebuyers over that last two years and found that the IRS needs to “improve its capabilities to identify taxpayers who must repay tax credits for homes they purchased under the First-Time Homebuyer Credit program”</p

The findings also provide an unpleasant surprise for a few peoplernwho took advantage of the credit, but good news to many more. In the firstrncase, some homebuyers received what they thought was a gift of up to $8,000rnwhich was actually a loan.  In thernsecond instance, homebuyers will not have to pay back money as they thoughtrnthey would. </p

In 2008 the Housing and EconomicrnRecovery Act, the first attempt to stave off a looming housing crisis, containedrna “tax credit” for first time homebuyers – or at least those who hadrnnot owned a home during the previous three years – of 10% of the purchase pricernup to a cap of $7,500 if they purchased a home between April 8, 2008 and Julyrn1, 2009.  This was an interest-free loan</athat would be recaptured through a slight increase in the homebuyer's taxes duringrneach of 15 years, starting the second year after the house purchase.  The idea behind the credit was to defer a bitrnof the cost of purchasing a home into the future when, hopefully, the economy could help pay it back.   </p

With the housing market still inrnextremis, Congress passed another bill, the American Recovery and ReinvestmentrnAct of 2009, which also included another homebuyer tax credit, this time an outright cash rebaternof ten percent of the purchase price with an $8,000 cap. The effective dates forrnpurchases were originally set for January 1, 2009 through November 30, thusrnoverlapping the first tax credit authorization. rnA third bill, the Worker, Homeownership and Business Assistance Act ofrn2009 extended dates of the $8,000 credit into 2010 and added a smaller creditrnfor repeat buyers.  That legislation doesrnnot appear to, as yet, be part of the problem. rnAll three of the billsrncontained nearly identical provisions for recapturing the credit if the housernwere sold within three years and for waiving the recapture if the owner were torndie or sell the home without a gain.</p

The TIGTA study identified the potential forrnconfusion between the interest free loan in 2008 and the 10 percent tax credit in 2009 when an auditrnnoted that taxpayer accounts were not properly coded to indicate that theyrnpurchased their homes during 2009. In some instances, the IRS did notrnaccurately distinguish between individuals with a 2008 home purchase and thosernwho purchased in 2009.  </p

73,119 (4.1rnpercent) of those receiving the tax credit had incorrect purchase dates shown onrnthe IRS computer system.  Ofrnthose, 59,802 had purchased their homes in 2009 and the IRS eitherrnincorrectly recorded the purchase date as 2008 or did not record the date atrnall.  9,122 of these taxpayers incorrectlyrnreceived their credits in the form of a tax refund while 59,802 individuals werernnotified that the tax credit portion of their refund was subject to repayment. </p

The report also found that $10.1 million in Homebuyer Credits were claimedrnby 1,326 taxpayers who were identified as deceased by the Social SecurityrnAdministration, about a third of whom had actually died more than a year beforernthey allegedly purchased a home. The IRS did not allow 528 of those individualsrnto receive over $4 million they had claimed.   </p

The report recommends that the Commissioner ofrnthe IRS Wage and Investment Division correct the purchase dates for the accountsrnwith incorrect purchase dates. TIGTA also found that the IRS does not currentlyrnhave the ability to identify individuals who received a credit and later ceasedrnusing the home as their primary residence, which would accelerate recapturernrequirements. The IRS said it would usernthird-party property records to verify home purchase or disposition and willrnrefer discrepancies for appropriate resolution. rn

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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