WASHINGTON — The IRS has an urgent message for would-be home purchasers: Make the most of the $8,000 first-time buyer tax credit before it disappears Dec. 1 — if you qualify.
But if you don’t truly qualify, don’t try to play games with the credit. The IRS already has 24 criminal investigations of suspected fraud under way around the country. It has executed seven search warrants and last month a tax preparer in Florida entered a guilty plea on federal charges of fraud in connection with the first-time buyer credit. He’s awaiting sentencing and faces up to three years in prison and a $250,000 fine.
Congress’ two versions of the first-time buyer credit — a repayable $7,500 credit in 2008, and this year’s more generous $8,000 nonrepayable credit — have stimulated home sales nationwide. But they’ve also become irresistible temptations for dishonest taxpayers to cash in and claim bogus refunds.
Claiming the credit looks so easy: You just fill out IRS form 5405, list the address of the house you bought, mail it in and wait for your money from the IRS in a month or two. Who’s going to check on whether you really qualify under the definition of first-time buyer — someone who hasn’t owned a principal residence during the previous three years — and that you’re eligible on income and other factors?
And with thousands of people buying houses and claiming tax credits, who’s going to be able to check on all those filings? The answer from the IRS: We are. In a statement at the end of July, the agency said it uses “sophisticated computer screening tools to quickly identify returns that may contain fraudulent claims for the first-time home-buyer credit.”
The IRS won’t discuss the nature of the screening it does, but it’s clear from the number of investigations ongoing that claims for the credit are getting special scrutiny.
In the case of the Florida tax preparer, one tip-off evidently was the sheer number of clients who claimed credits as first-time buyers. James Otto Price III of Jacksonville entered a plea of guilty to charges that he fraudulently submitted returns claiming tax credits for 15 clients, some of whom apparently did not understand what he was doing.
According to a summary of the facts agreed to by Price as part of his plea agreement, he admitted that in February of this year, he met with a client who told Price that she didn’t plan or want to buy a house. But Price insisted that she qualified for the credit because “she had two jobs.” He then wrote in a house address on the form 5405, claiming the client closed on the purchase Jan. 5. When she received her $7,500 credit, Price took $1,000 of it for himself.
In the plea agreement, Price admitted following a similar pattern for 14 other tax returns — fraudulently claiming the credit and then siphoning off part of the refunds.
Terry Lemons, a spokesman for the IRS, declined to discuss the ongoing criminal investigations of taxpayers claiming the home-buyer credit. He did say the investigations involve individuals as well as tax-return preparers.
Lemons emphasized that “we don’t want to discourage people from taking advantage of the credit,” but the IRS also wants taxpayers to be certain that they’ve read through the eligibility rules so they don’t end up with audits, back taxes and late penalties. Among the key qualification requirements that can snag unwary buyers:
- Even if you haven’t owned a home during the past three years, you won’t qualify for the credit if you purchase your house from a “related person.” That’s a broad category of people and entities, ranging from immediate family members — a spouse, parents, children, grandparents, grandchildren — to a corporation or partnership in which you have more than a 50 percent ownership stake.
- You are eligible individually, but your spouse, who co-purchased the house with you, is not.
- The house you are claiming was acquired through an inheritance or a gift.
- You are otherwise eligible but you financed the house through a tax-exempt mortgage bond program.
- You make too much money — in excess of $95,000 of modified adjusted gross income for singles, $170,000 or more for married joint filers.
What are the downsides if you claim the credit erroneously and do not intentionally defraud the government? If you are audited, the IRS most likely will ask for the full credit amount back, plus interest and a late-payment penalty.
Bottom line: Don’t let this year’s tax credit pass you by if you meet the criteria. And if you don’t qualify, beware of slick-talking professional tax preparers who tell you that you do.
Kenneth R. Harney is a nationally syndicated real estate columnist with the Washington Post Writers Group. His e-mail address is email@example.com.