Exclusive Report: Inmates Defrauding Home-Buyer Tax Credit

June 23, 2010 — -- Since its inception, the home-buyer tax credit has proved extremely popular with millions of new homeowners.

But according to a Treasury report obtained exclusively by ABC News, it's also wildly popular with some felons who, despite being in prison, are allegedly claiming the tax credit, bilking millions from taxpayers.

The report, prepared by a Treasury Inspector General, estimates that 1,295 inmates filed fraudulent claims totaling $9.1 million. Some of the inmates who received government checks were serving life sentences for serious crimes, sources told ABC News.

"In swiftly making the First Time Homebuyer Credit immediately available to more than 2.6 million homebuyers, a very small number of payments were made to prisoners incorrectly, which the IRS is now taking all steps to recapture and to prevent going forward," the IRS said in a statement. "The IRS will follow up on every instance of an improper prisoner payment and take swift and appropriate enforcement actions."

The report also found that the IRS approved multiple claims that were filed on the same home.

Investigators say part of the problem was that under the tax credit program, the IRS initially did not require taxpayers to provide documentation to prove they actually bought a home.

IRS officials said improvements have been made and only a small number of inmates were able to beat the system. They said the IRS successfully blocked or denied nearly 400,000 "questionable homebuyer claims and opened more than 150 criminal investigations."

Those efforts, the IRS said, saved taxpayers more than $1 billion.

"The IRS does not have access to reliable, accurate data on all prisoners and encourages Congress to enact legislation to give IRS the data it needs on all federal, state and local prisoners," the IRS said. "When the IRS has good information, the agency has an effective system for blocking claims by prisoners."

IRS: Homebuyer Tax Credit Helped 2.6 Million Americans

Before it expired at the end of April, the program granted up to $8,000 in homebuyer tax credit for more than 2.6 million first-time homebuyers, according to the IRS.

The program provided a much-needed boost to a sagging housing market and according to the National Association of Realtors, an estimated 44 percent of home buyers would not have closed the deal last March without it.

First-time home buyer Toni Austin, a 30-year-old hairstylist, made an offer on a Washington, D.C.-area home in April. If the house passes inspection she will finally be a homeowner -- something she's dreamed of for years.

"It's a big step, so the nerves are definitely present," she said. "The tax credit is very important to me."

Separating those that should've gotten the credit, like Austin, from those who make their home behind bars is serious business for the IRS.

"The IRS will follow up on every instance of an improper prisoner payment and take swift and appropriate enforcement actions," the agency said.

ABC News' Lee Ferran and Bianna Golodryga contributed to this report.