Tax Law Updates | New Proposed Regulations

September 20, 2011

TIGTA: IRS Allowed Improper Claims for First-Time Homebuyer Credit On Amended Returns

Control Weaknesses Over Amended Returns Allowed Some Inappropriate Claims for the First-Time Homebuyer Credit to Be Allowed
Reference Number: 2011-41-057, 6/24/2011

TIGTA: IRS Allowed Improper Claims for First-Time Homebuyer Credit On Amended Returns

While the Internal Revenue Service (IRS) has made improvements in its processing of First-Time Homebuyer Credits, additional steps are necessary to prevent erroneous claims for the Credit on amended returns, according to a new report publicly released by the Treasury Inspector General for Tax Administration (TIGTA).

Many taxpayers who purchased a home in 2008, 2009, or 2010 were able to take advantage of the Homebuyer Credit and claim up to an $8,000 refundable credit on their tax return.

The Homebuyer Credit may be an interest-free loan or a fully refundable Credit depending on when the taxpayer purchased his or her home. Taxpayers have several filing options to claim the Homebuyer Credit, one of which is filing an amended tax return.

The IRS reported that as of January 29, 2011, it had processed more than 1.4 million amended claims for Homebuyer Credits totaling more than $10 billion.

TIGTA reviewed whether the IRS had controls in place to ensure that Homebuyer Credits claimed on amended U.S. Individual Income Tax Returns (Forms 1040X) were appropriately processed. Its report found that taxpayers inappropriately changed their home acquisition date on amended returns to avoid repayment of their Homebuyer Credit.

In addition, some taxpayers received multiple refunds of the Homebuyer Credit. Many questionable claims for the Homebuyer Credit were not appropriately sent to the IRS’s Examination function for scrutiny.

“While in response to our previous recommendations the IRS took a number of positive steps to process Homebuyer Credits claimed on amended returns, this report found additional issues related to the Credit,” said J. Russell George, Treasury Inspector General for Tax Administration. “Additional controls are needed to prevent inappropriate claims on amended returns,” the Inspector General added.

TIGTA also found that the IRS paid an estimated $37 million in interest on claims for the time period prior to actual home purchase dates. It is unclear whether Congress intended for this interest to be paid. Finally, some claims for the Homebuyer Credit were significantly delayed.

TIGTA recommended that the IRS:

- implement procedures to identify taxpayers who change the year when their home was purchased or receive more Homebuyer Credit than they are entitled to, and recover invalid claims through examinations;

- ensure that employees receive proper training and perform quality reviews of Homebuyer Credit claims;

- identify interest-related issues on any future legislation and work with the Department of the Treasury’s Office of Tax Policy to request clarification from Congress, if warranted; and

- ensure that timeliness standards are adhered to when cases are referred to the Examination function.

IRS management agreed with TIGTA’s recommendations and has initiated appropriate corrective actions.

View a PDF of the article

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