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Hey Kid, Wanna Buy a House?

October 23, 2009 · 11 comments

Information involving potential fraud with respect to the first time homebuyer’s credit continues to make headlines. After initial reports that over 100,000 refunds were perhaps inappropriately distributed, the IRS has released more data about fraud relating to the credit.

Officials from the Internal Revenue Service testified before Congress that as much as $600 million of taxpayer credits are “suspicious.” Of those, the IRS suspects that 73,799 claims totaling almost $504 million appear to have been distributed to individuals who would not qualify as first time homebuyers. And – wait for this one – 582 taxpayers under the age of 18 years old, including several 4 year olds, applied for and received the credit. The legislation does allow for minors to apply for the credit but as young as 4? That seems to indicate some kind of attempt at income shifting or other manipulation from parents who were ineligible for the credit.

And it gets worse. More than 19,000 taxpayers have been identified as making application for the credit for properties that were not even purchased in the first place. Nearly 74,000 taxpayers already owned a home, apparently under the impression that the “first time homebuyer’s” bit didn’t apply to them. Many were over the income limit or applied for more credit than they were entitled to received.

Over 3,000 taxpayers did not file with a Social Security number, using an ITIN instead. The IRS issues ITINs to individuals who need a taxpayer identification number but who are not eligible for a Social Security Number. Both resident and nonresident aliens are eligible to apply for an ITIN but the numbers of taxpayers with ITINs claiming the credit has lead some to believe that significant refunds were paid to those illegally living in the country and not eligible for the credit.

All honest mistakes? Not quite. The IRS has flagged at least 8,000 claims for criminal fraud. Currently, 115 are under investigation as criminal cases.

Despite all of the bad news, realtors and not surprisingly, bankers, want to extend the credit. Some on Congress seem to agree including Sen. Johnny Isakson (R-GA), who wants to expand the credit to dole out refund an additional $17 billion. Billion.

However, the White House is not as positive. Treasury Inspector General J. Russell George said, “Based on the administration of the credit today, I am very concerned about the IRS’s ability to effectively administer the credits that are claimed before the Dec. 1 deadline, let alone any credits that may be claimed within future extended deadlines.”

In response, the National Association of Realtors had this to say: “Without congressional action now, the market and our national economy may freeze again — possibly as soon as this month.”

Which begs the question: why not watch and see? Is it possible that a market solely driven by government incentives to buy isn’t a real market at all? Fraud notwithstanding, is the credit just creating false demand or accelerating existing demand? If we give an incentive to buy today instead of tomorrow, who buys tomorrow? Do we keep incentivizing until we can’t stop?

This worries me (yes, I’m channeling a little Tim Gunn here). I’m not really a fan of tax policy solely to manipulate behavior in the first place (home mortgage interest deduction, for example). But once you start, how do you pull the plug?

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{ 2 comments… read them below or add one }

1 Mary Kay Foss October 23, 2009 at 1:11 pm

The creativity of tax cheats continues to astound me. I wish they would use their creativity for the good of all instead of personal gain. Maybe IRS needs a consultant to tell them all of the possible ways to get around the rules first so they can design forms and procedures to cut down on fraud.

2 u262f October 26, 2009 at 3:56 am

I completely agree with your last two paragraphs, and I wish people would take that into consideration. If the population grows, we won’t have enough land for everybody, and all these incentives are going to merely create another housing bubble cycle all over again. People should buy a house when they’re financially ready and when they want/need one, not because they want to take advantage of some random tax shelter. All this meddling merely shifts the length of the housing cycles and does nothing useful in the long term.

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