Update on the Homebuyer Tax Credit

The $8,000 tax credit for first time buyers appears to be headed for an extension. Under terms proposed in the Senate, the credit will be extended past the original November 30th deadline. It will now be effective until mid-2010, but a home would have to be in escrow by April to qualify for the credit.

In addition, the credit will also be expanded in several ways. A reduced credit of $6,500 would be available to "move-up" homebuyers who had previously lived in their homes for at least five years. In both cases the credits would have to be repaid if a buyer did not stay in the home for at least three years.

In addition, it is proposed that the income limits are to be raised as well. Currently the limits are $75,000 for a single homebuyer and $150,000 for a couple. These would be increased to $125,000 and $225,000 respectively. This is good news for prospective homebuyers coming on the heels of disturbing news that some people have already learned how to use the system fraudulently. 

As of October 1, 2009, 1.2 million homebuyers had applied for the credit on their returns, using $8.5 billion of the $13.6 billion authorized. However, in testimony before Congress, J. Russell George, the Treasury Inspector General for Tax Administration noted that the IRS had not installed effective controls on the process. He said that the IRS would not properly verify the eligibility of applicants by requesting that the HUD-1 closing document be filed with the return.

This form, given to every purchaser upon closing, would verify the purchase date and the price paid and other details of the transaction. Even that form would not, however, verify that the applicant had not owned a home previously. To verify that, the IRS has developed a computer program that, presumably, examined an applicant's 1040s for the preceding three years to see if the applicant had taken a mortgage interest deduction. As a result of this, the IRS determined that some 74,000 taxpayers had applied for the tax credit for which they were not entitled.

In addition, the Inspector's staff had identified 19,300 returns for which a property had actually not been purchased. In a bizarre twist of the law, the IRS does not actually have the power to reject such claims. They can just use that information to initiate an audit which might later result in denial of the credit.

Finally, the Inspector found tax credits claimed from 580 taxpayers who were younger than the minimum required 18 years of age. The youngest applicant was only four years old. One would only hope that some mortgage fraudster didn't saddle that four-year-old with a toxic mortgage.

Those who are interested in 20 minutes of hilarious entertainment can see the entire report HERE.  

A televised report on 60 Minutes last week showed how rampant Medicare fraud is in South Florida. Nationwide, this type of fraud is estimated to cost the government – and ultimately the taxpayers – some $500 billion. In this case, the fraud is being carried out by people who intend on wholesale gaming of the system as a criminal enterprise.

However, in the case of the homebuyer tax credit, we are talking about individual American families trying to cheat the system. This makes you wonder about the state of our society's honesty, but I suspect that these people do not consider themselves criminals. Our economy is in dreadful shape, the government comes along with a means of bootstrapping our fragile housing industry, and a large number of people just look upon it as another opportunity to cheat their neighbors.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.