Fraud in First-Time Homebuyer Program

Some Americans are using children as young as age four to defraud the government out of an $8,000 tax credit for first-time home buyers.

In additional to using kids to qualify for the credit, some people who already own homes are taking the first-time buyer credit, others are claiming the money just because they're thinking about buying a home, and some fraudulent claims are even being submitted by IRS employees.

Congress today heard allegations of fraud in the new program meant to increase home sales and help put lower-income Americans into their first houses.

The home buyer credit was a key element of the $787 billion stimulus package enacted last February. Under the measure, low- and middle-income first-time home buyers purchasing a home between Jan. 1 and Nov. 30 of this year could claim a credit of up to $8,000 on their 2008 or 2009 income tax return. So far 1.4 million people have claimed the credit at a cost of $10 billion.

But the program was put into place so quickly that there were not enough safeguards to prevent fraud. Congress is now looking into the extent of the fraud and how to fix it.

Rep. John Lewis, D-Ga., chairman of the House Ways and Means Subcommittee on Oversight said, "We will hear today that taxpayers claiming the credit include those who already owned a home, who had not yet bought a home, and who are children -- some as young as four years old."

Russell George, inspector general for tax administration at the Treasury Department, said some homebuyers are using their children to get around income limitations.

"We identified more than 580 taxpayers younger than 18 who claimed almost $4 million in first-time home buyer credits, the youngest of which were taxpayers who were four years of age," he said.

George also testified his office identified more than 19,000 tax returns filed electronically in 2008 where someone who already owned a home tried to take the credit, costing taxpayers $139 million. And, he added, that does not include returns filed on paper.

Linda Stiff, deputy commissioner of the IRS, told the hearing she had identified as many as 160 fraudulent schemes involving the tax credit and most of these are already under review. "We've had indications on 115 cases of potential schemes involving about 8,000 taxpayers and tax returns that are currently under criminal investigation," she said.

The returns of another 100,000 taxpayers who took the credit are currently under audit. Although in some of those cases the experts say it may just be that forms were improperly filled out, not that there was intent to defraud.

But some who should know better seem to be committing fraud.

"It is also very troubling that my auditors discovered that among those who apparently wrongly claimed the credit are a number of Internal Revenue Service employees," said George. "These cases have been referred to my office of investigations for review."

Committee Democrat Xavier Bacerra of California admitted the program could be in jeopardy.

"If we continue to have errors or fraud in a system like this, we can't sell this to the American public," he said.

Republican Charles Boustany of Louisiana noted the design of the tax credit program lends itself to fraud.

"Every time Congress creates a new refundable credit, meaning that individuals get a check from the government whether or not they have actual tax liability, the incentive for fraud is magnified," he said.

Rep. Bill Pascrell, D-N.J., said the government may have rushed this program into place without the proper safeguards.

"We're flying by the seat of our pants. That's exactly what we're doing. And that's why a lot of folks are taking advantage illegally of this program," Pascrell said.

Among the fixes being considered are putting an age limit on applicants and having those who want the credit prove they actually bought a home and it is their first home.