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Cheater, Cheater, Pumpkin Eater: Home Buyer Credit Fraud Rampant

October 22, 2009 · 18 comments

Soooo… You know that I wasn’t a fan of the first time home buyer credit. It was touted as a “stimulus” for middle class taxpayers to make home buying more affordable. The idea was that folks would rush to buy homes, thus buoying the housing industry, getting banks going again and more or less saving the planet. At least that’s how I remember it being pitched.

Initially, it was all good news related to the credit. After the IRS paid out nearly $10 billion to 1.4 million taxpayers, Moody’s Economy.com chief economist Mark Zandi reported that almost 400,000 new and existing home sales were attributable to the tax break. So good. Only, the report went on to say that some of those home sales were actually attributable to being “stolen from future demand” meaning that taxpayers simply had an incentive to buy now as opposed to later. The suggestion is that the housing market will slow post-credit (indications are that it’s already happening).

Despite the slowing, the credit did some good even if it was financed by the Treasury. So, of course we should extend the credit, since it’s so great and all, right? I mean, that’s what Congress is saying. For example, Senate Finance Committee Chair Max Baucus (D-MT) supports a three-month extension of the credit and similar bills are pending in the House.

Maybe not so fast. The IRS announced earlier this week that it is investigating more than 100,000 “doubtful claims” related to the credit. In fact, to date, the IRS has instigated 107,000 civil claims related to the credit – about 8% of the taxpayers who’ve applied for the credit. A quick turn of the math shows that to be up to $800 million in potentially false credit.

It’s not all individual fraud, either. According to a House Ways and Means oversight committee, the IRS is investigating 167 “criminal schemes” involving the credit.

And that’s just in the early stages of review.

Sheesh. I figured that what would really happen is just that it would nearly drain the Treasury and perhaps artificially push up home prices. I clearly underestimated the efficacy of the criminal mindset.

(Hat tip: Kay Bell)

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{ 7 comments… read them below or add one }

1 Urbie October 22, 2009 at 7:58 am

Kelly, what kind of documentation are you telling your clients they’ll need, to back up their claiming the credit if they get audited? That is, how do they prove they’re first-time homebuyers (according to the definition)? Has the IRS said what it’s going to ask for when they audit people? (Translation: Yes, even at HRB, I’m undoubtedly going to see some new homebuyers this coming season ;-)).

2 Kelly October 22, 2009 at 8:26 am

I think a HUD sheet/settlement sheet would do the trick.

3 MommyLisa October 22, 2009 at 9:57 am

http://kstp.com/article/stories/s795057.shtml?cat=1

Even before the credit people where defrauding lenders and sellers of homes – and ultimately the tax payer.

4 ThomasT October 22, 2009 at 11:44 am

As a new home owner, thanks to the credit, I’m clearly in favor of it. In our sample of one family, I would say that it is probably the case that it stole from future demand, but by a very significant amount – 4-5 years. And at least in Philadelphia, this aspect of the stimulus not only bolsters the for-profit participants in the house-sales industry, but provides a useful boost to the city treasury from the transfer tax.

And I wonder how much of the fraud is, as the home purchases are accused of being, merely transferred from one opportunity to another? Ie, if there are people out there willing to defraud the government, is this really the motivating factor?

And we have this story because people are getting caught – so it seems that the costs will mostly be in enforcement and punishment, not so much losses from the fraud itself. I’d bet that if you took the net costs of fraud and enforcement from the homebuyer credit and the net income from your favorite enforcement scheme, the offshore amnesty program, the IRS still comes out ahead in revenue generation for the US Treasury this year.

5 Belinda Roberts October 23, 2009 at 9:35 am

Why is the concept of “stealing from future demand” a bad thing in terms of a housing tax credit but perfectly acceptable and used to tout benefits of cash for clunkers?

6 linda October 24, 2009 at 12:04 pm

Currently and continuing there are 582 taxpayers under the age of 18 yrs that claimed the tax credit($4 million) 1 Child was 4 yrs old. There was fraud on the Econonic Stimulus for $300-1,200.00 for we were wide open for $7,500.00-$8,000.00. No time to put safety provisions in place, just get the housing market moving. Oversight committee John Lewis(D.,Ga) introduced legislation Thursday aimed a blocking the fraud. limits to 18 to claim the credit and required the inclusion of A Hud-1form. This should have been done from the very beginning. Throw money out and then $$$ to get it back or perform audits and chase those cheats> No thought into it to begin with.

7 Andy June 23, 2010 at 9:40 pm

I still think the home buyer credit stimulus has done more good than bad for the economy and home buyers/sellers. After all, even if you assume the same amount of fraud was committed in 2009 when the home buyer credit program was expanded, it still only makes up about 2% of the total program outlays.

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