Justice Watch: First-time homebuyer credit program was ripe for abuse

August 22, 2011

John Pacenti

Tax credits are Congress’ way of influencing policy through the tax code, but they’re always ripe for abuse.

How ripe?

Ask the nearly 1,300 inmates who netted a total of $17.6 million under the expired first-time homebuyer tax credit despite being incarcerated.

“The problem you got with inmates is they don’t have a lot to lose engaging in tax fraud since many of them are going to be there for awhile,” said tax attorney Martin Press, a partner at Gunster in Fort Lauderdale. “Congress does not always put enough teeth in the law to require compliance, such as requiring documents and certificates to be attached to the tax return.”

Lawmakers birthed the first-time homebuyer tax credit after the housing bubble burst, hoping to jump start the real estate market by giving low-income earners a crack at seed money for a new house.

The credit equal to 10 percent of a home’s purchase price up to $8,000 was available from 2008 to 2010. The credit reduced tax bills or increased refunds, depending on how much was owed. Within days in February, the Internal Revenue Service issued tips for preparing homebuyer credit claims, and the Justice Department announced cases filed in five states to stop fraudulent credits claimed by tax preparers.

Preparers applied for the tax credit by filing an amended return, and the IRS cut checks to homebuyers. But the money often went to pay for anything but a new home. Some would-be buyers never showed up at closings. In other cases, houses were never in the picture.

It became a well-known scam, say some tax attorneys representing preparers now being audited. They say their clients were simply pawns.

“I guess in order to stimulate the economy, they were liberal in sending money to people without sufficient safeguards in place,” said Press, who doesn’t represent any tax preparers under the microscope.

The homebuyer tax credit might have seemed like a tonic as housing sales plummeted.

“Congress wanted to provide an incentive for people to purchase homes, and Congress did it quickly, and it turned out to be somewhat problematic,” said Edward Karl, vice president of taxation for the American Institute of Certified Public Accountants in Washington.

But as a consequence, some preparers are under scrutiny. Prosecutors have obtained injunctions against five South Florida tax preparers accused of making false claims for homebuyer credits.

“We have done a lot of successful investigations on return preparers in South Florida,” said IRS spokeswoman Ellie Michaud in West Palm Beach.

The IRS is under the gun after the Treasury Department’s inspector general for tax administration issued a report in June saying the agency needs to improve security measures to prevent false claims for tax credits.

“Many questionable claims for the credit were not sent to the IRS’s examination function for review,” an inspector general’s memo states. The IRS processed more than 1.4 million claims for homebuyer credits worth $10 billion through January.

The credit took several forms, including loans. The IG’s office found some taxpayers inappropriately changed their home acquisition dates to avoid repayment of homebuyer credits. Some taxpayers received multiple refunds on the same credit.

The IG’s office concluded the IRS paid an estimated $37 million in interest, but it remains unclear whether Congress intended to allow interest payments.

The report offered several recommendations to the IRS, such as better training on identifying fraudulent home purchase tax credits and working with Congress to avoid similar problems in the future.

Miami criminal tax attorney Robert Panoff said Congress needs to realize what a huge burden it is to administer tax credit programs. He said direct expenditures would be better than using indirect methods like changes in tax law.

“Social engineering through the tax code, through the use of tax credits, is problematical because it’s difficult to administer millions of people applying for the credit,” he said.

Miami attorney Jeffrey Nieman, a former federal prosecutor now specializing in tax matters, said the IRS has been particularly concerned about preparer mills.

When it comes to tax credit programs, he said, “More money seems to go out the door for illegitimate purposes than legitimate purposes.”

U.S. Attorney Wifredo Ferrer said in a statement Friday that it’s up to taxpayers to police their preparers, but his office keys in on tax fraud.

“The public needs to be wary of those tax preparers who make promises of refunds that are too good to be true,” he said. “It is illegal to file tax returns that make false and fraudulent claims, and filing false returns can cause serious problems for taxpayers, which take years to correct.”

Nieman said it would behoove the IRS to clamp down on the front end rather than chase money after it has been spent by scamsters.

One of the problems is that while accountants and registered tax agents are at the top of the tax preparer food chain, anyone can hang up a shingle outside their home and start filing tax returns.

It wasn’t until this year that tax preparers even had to register with the IRS.

A Broward County registered agent, who said he didn’t want his name used, said there’s a scared-straight aspect to the rash of recent prosecutions of preparers on a variety of charges.

“When I go to (IRS) conferences, they always throw up a list of all the different people, the preparers incarcerated,” he said. “I think the complexity of all these tax credits aids the ability to do bad things.”

Karl said some tax credits have been subject to abuse, but confusion is common, and honest mistakes are sometimes made by preparers. He called the earned income tax credit “horribly complex.”

“The combination of these complexities and the refundable nature of the credits have led to a number of problems,” he said.

The association is pleased the IRS heard some of its concerns about how tax preparers will be registered, trained and tested, but he still expects to see fraud.

“The truth is we know the vast majority of preparers are competent and ethical,” Karl said.

The association support attempts to minimize the complexity of the tax code, but Karl said a simple tax system would not work in the world today.

“We live in a very complex financial world,” he said.

John Pacenti can be reached at [email protected] or at (305) 347-6638.