First-Time Homebuyer Credit Developments

July 5, 2010 | Roger McEowen


Last month, the Treasury Inspector General for Tax Administration (TIGTA) released a report detailing numerous areas of fraud associated with the first-time homebuyer tax credit.  The report is 30 pages long.  To summarize TIGTA's report, an estimated 14,132 persons received a tax credit that they weren't entitled to, amounting to $26.7 million.  Of that $26.7 million, $17.6 million was received by 2,555 taxpayers who bought homes before the effective date of the law for which they were claiming the credit.  That computes to a $6,900 gift to these tax-cheats from law-abiding taxpayers.  What's worse is that 1,295 incarcerated persons got credits totaling $9.1 million (an average of $7,027 per person) - they were in prison at the time they claimed they purchased the home at issue.  TIGTA said they didn't file joint returns, so a home purchase involving a spouse wasn't in issue.  Also, of the 1,295 prisoners, 241 of them were sentenced to life in prison! 

TIGTA also found that 10,282 taxpayers got a tax credit for a home that someone else owned and was also taking a first-time homebuyer credit on.  TIGTA hasn't put a number on the erroneous credits granted in this scenario, but it will be big.  Also, the report concluded that at least another 34 IRS employees improperly claimed the credit (they had already identified more than 50 had improperly claimed the credit in 2009).

Of course, the Congress enacted the tax credit in 2008 to boost the housing market that crashed after high-risk financing techniques didn't pan out.  Has it worked?  Well, you be the judge.  It certainly has borrowed home sales from the future and put them in the present.  Most recently, it borrowed May home sales and stuffed them in March and April.  Just released data shows that new home sales dropped to a record low for the month of May - just after the credit expired at the end of April.  The drop was 32.7 percent, and sales from year-to-year were off 18.3 percent.  That's the slowest sales pace since the government started collecting data in 1963.  The ultimate impact - the Congress gave us a very costly credit riddled with fraud, with no long-term stimulative effect.

To read the Treasury Report: FTHBTC Fraud.pdf

So, what is the Congress considering to do to fix the problem?  For starters, they did retool the credit in the fall of 2009 (after extending it from its initial expiration date in the spring of 2009 to the end of November 2009) to specify that, in general a taxpayer had to be at least 18 to claim the credit, and that it wasn’t available to persons that could be claimed as a dependent on someone else’s return.  That same bill also extended the expiration date again – this time to the end of April of 2010 - and added a long-term homeowner credit.  The bill also said IRS had certain additional enforcement authority, but it wasn’t any power IRS didn’t already have to police the credit.   

The Homebuyer Assistance and Improvement Act of 2010

Overall, numerous bills have been introduced in 2010 to extend the credit.  It was set to expire at the end of April.  For taxpayers that had entered into purchase contracts by the end of April, they had until the end of June to close the deal.  Certain military personnel have an additional 12 months from those respective dates.  The U.S. House proposed extending the credit in the extenders bill that has passed the U.S. House, but that bill died in the Senate because of a proposal to hike taxes on small professional S corporations.  But, in late June, both the House and the Senate did pass a bill extending the credit through the end of September.  But, the extension is just for those persons that had entered into home purchase contracts by the end of April.  They now have until the end of September to close on the contract.  The legislation extending the credit comes at an estimated cost of $140 million, and is a stand-alone bill termed the “Homebuyer Assistance and Improvement Act of 2010.”  The bill number is H.R. 5623, and it passed the House (409-5) on June 29 and the Senate (by unanimous consent) on June 30 and was signed into law on July 2, 2010 as Pub. L. No. 111-198.  The Act applies to both first-time homebuyer and long-term homeowners that are claiming credits, and doesn’t change any of the other requirements that must be satisfied to receive the credit. In an attempt to crack down on fraud associated with the credit by professional criminals, the Act gives the IRS the authority to disclose prisoners’ tax return information to the head of any state government agency administering prisons.   

In an attempt to offset the cost of the Act, the Congress also extended the existing bad check penalty tax (a two percent tax under I.R.C. §6657) to electronic payments to the IRS that are made in satisfaction of a tax liability, but where payment does not occur due to insufficient funds.  The Act also delays for one year (until 2011) the deadline for the Department of Homeland Security to transfer initial set-up fees for the Travel Promotion Board. 

Now that the House extenders bill failed in the Senate due to an uproar from tax professionals and other professional service firms over the strange tax increase on small S-corporations, the House and Senate are considering a different approach.  The bills are termed “jobs” bills (again), and would bring back bonus depreciation, further enhance expense method depreciation and extend capital gains tax relief for qualified small businesses. 

We’ll keep you posted on what, if anything, eventually becomes law.  If it occurs, it will probably be before the Congressional recess scheduled in August.  Is the legislation, which continues a trend of “stimulus” legislation, the right approach?  Well…you be the judge.  Since the present session of Congress began in January of 2009, unemployment nationwide is up 25 percent and the deficit and national debt aren’t getting smaller.