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Monday, April 5, 2010

First-Time Home Buyer Credit Problems

On April 1, 2010, the Treasury Department reminded people (if they read Treasury press releases), that they have just to the end of April to buy a home so they can claim the up to $8,000 refundable first-time homebuyer credit (TG-622). The Worker, Homeownership and Business Assistance Act of 2009 (P.L. 111-92; 11/6/09), extended the credit to homes purchased before May 1, 2010 (for summary and links, see Nellen, Documenting the First-Time Homebuyer Credit, AICPA Tax Insider, 3/11/10).

When Congress extended the credit last November, they added features to reduce abuse. For example, individuals must now attach the closing statement to prove that they actually purchased a house. They must also be at least 18 years old. There have been many stories of abuse (see, for example, 2/27/10 post).

There are also stories of people who qualify for the credit being greatly delayed in receiving it because of the IRS asking for additional information (this pertains to the credit prior to the documentation change in November 2009). BNA had a story on this today (4/5/10) - "Treasury Reminds Taxpayers of April 30 Home Buyer Credit Deadline; Issues Remain." The BNA article includes stories of challenges some taxpayers have had in claiming the credit including one where someone who purchased a condo was denied because the IRS told him apartments did not qualify (the condo had a unit number). That taxpayer eventually got the credit approved after getting the IRS Taxpayer Advocate involved.

Per the BNA article, IRS Commissioner Shulman noted in his March 25 testimony before a House Ways & Means Committee that the IRS would likely open 200,000 audits in 2010 due to the homebuyer credit (here is a link to the testimony - that figure must be in his oral testimony as I don't see it in his written testimony).

This is an unfortunate use of IRS audit resources. I say this because I think this first-time homebuyer credit is an example of the need for members of Congress, the Administration and the public to stop expecting all benefit and stimulus programs to be handled via the tax law. Given the large dollars involved in the credit, its goal to stimulate home purchases (so people most benefit by getting the funds at time of purchase), it should have been administered as a grant by a unit within the US Department of Housing and Urban Development (HUD) for example. They could have verified eligibility during the loan approval or closing process and the funds could have been available at closing of the home purchase. Then IRS audit time could be used for better purposes. Today, the audit rate for individual returns is just 1% (IRS 2009 Data Book, pg 22). Now in 2010, the IRS will spend a lot of time auditing 1040s that claimed the homebuyer credit - most legitimately.

I think it would be good if Congress came up with some standards for when a new spending program should be administered via the tax law and when it should be a grant program administered by an existing federal agency. For example, the higher education tax credits could be handled via the Pell grant and similar Department of Education programs. This approach would reduce fraud, would enable the funds to go to those who truly need them (such as people with income too low to owe income taxes) and the students would get the funds when needed such as at the start of a semester rather than after filing a tax return).

What do you think?

17 comments:

MWEinNC said...

Agree, 100%. I would suggest that most of these programs are implemented via tax breaks instead of managed grants because it's a lot easier for people to take advantage of the tax break, and therefore you get more participation than you might get in a grant program.

Professor Nellen said...

Yes - that is a great point. Taxes reaches even more people than do elections! But where the benefit can be tied to an existing program, I think it should be considered. For example, students seeking federal or state grants are already connected to a gov't agency so also distributing dollars in that way that are currently distributed via tax credits would work. I'm not an expert on the role of the federal gov't in housing loans, but believe there is a system in place here too that might have been usable for the first-time homebuyer credit. Thanks for the comment.

J-Fly said...

I think the IRS is struggling with the amount of First-Time Homebuyers credit request they're receiving. It's just my opinion, but I believe people are being delayed the tax credit because the IRS is overwhelmed with the many submissions and they're coming up with any excuse possible to not submit the claim. I'm currently working on my second attempt to claim my $8000 First-Time Homebuyers Tax Credit. The first denial was due to the IRS claiming that I did not provide the HUD final closing paperwork when I did. The second denial was due to the IRS claiming that I don't qualify because I've previously owned a home which is not true. This is my first home and it is very frustrating.

JRTENN said...

To mention our First Time Home Buyer Credit problems...

Filed a proper tax return AND IRS requested Settlement Papers April 13th 2010, by mail. No tax liability.

We attached a signed copy of the closing statement to the 1040 tax return for 2009 tax year, as that's what the IRS requested. Married filing jointly, our income for 2009 was FAR FAR below the phase-out maximum.

The IRS promptly lost our closing statement, and now we had to re-copy many forms (closing statement, cashiers check that paid for the home, copies of recent utility bills and bank statements that proved it was a real house and that we are using it as our principle residence, etc.) If the IRS is doing this (i.e., prove everything three times over) to a great many filers, why didn't they ask for all this in the first place?

It's July 2, now, and instead of a Rebate/Refund Check, we are waiting well over 75+ days for our rebate check.

Regarding the above last "second set re-copy" of materials sent as properly done and mailed, on June 30th, we received IRS postal letter advisory that the second set of documentations arrived at the IRS mail center on June 10, 2010, and now we will hear from them within another 30 days.

We all understand that the IRS needs to be sure that no one is trying to "fake" a transaction or home ownership, but something else other than "they are really busy" is clearly going on here.

It very much looks like and has the consistency of a deliberate roadblock situation, where you send more and more proof(s) and this just drags on and on.

Anonymous said...

I feel better reading this, I have had tremendous issues getting my credit. I was told there was no HUD on my return, which it was definatley included. Then the next letter indicated I did not sign my return, and asking for the HUD again. I definately signed my return. Very annoying. I am now told that my HUD was in an incorrect format. What the F... does that mean? I have a tax payer advocate working for me... I wont hold my breath. ooh and I submitted my return in Jan. 00

Parag said...

Bringing this credit back is not supposed to help buyers. It really helps realtors, who need the commission income, local governments who need the tax and fee income and holders of foreclosed properties, who have massive inventory that still needs to be moved.

Homebuyer credit

David E said...

I used the credit to pay my estimated tax bills for 2009 and they have been sending me letters saying they need 45 more days to look at my request. I sent them 40 pages of documentation proving that I did not own a previous home and used return receipt with the USPS. They sent me a letter in October 24th stating they had received my letter dated from August 14th. I just received my 3rd letter saying its going to be another 45 days for them to get to me. In the mean time they are issuing me interest and penalties while I wait on their answer.

JENNIFER said...

Wow, I guess I am not the only one. I have sent my HUD statement three times, then they have asked foe more documentation, ie: copy of cashiers check, drivers licsence, utility bills. My original return was filed Feb.of 2010! Are they going to pay me interest on the 8000 dollars they are holding of mine. Just now found out about getting a tax advocate. Will see how that goes.

Anonymous said...

I have provided requested identical information to the IRS examiner's office multiple times. This includes HUD statements, contracts with dates and signatures, driver's license, utility bills, etc, etc. We finally rec'd a letter that stated we were denied for two reasons. We appealed the denial, provided the information that they said were the reasons we were denied only to be told that we are now denied for OTHER reasons. My tax advocate actually has said to me that my husband and I are not a priority for payout because we are not losing our home. He went on to say, "We don't have the money to pay you." Is this acceptable?!?!

Professor Nellen said...

Response to anonymous - that is not acceptable. There is nothing in the first-time homebuyer credit that give a preference to someone in financial need. You just need to meet the requirments to get the credit and it is yours. Sounds like you should be sure to contact the IRS Taxpayer Advocate Office and let your congressman know as well. Good luck.

Anonymous said...

I bought my home in September of 2009 and filed an amendment to my 2008 return in November of 2009. I have yet to receive the First Time Home Buyer Credit. The IRS loses information repeatedly. I even hired and attorney (which I cannot afford) as a last resort to help and they lost that information. It's one excuse after another and I think the IRS does this intentionally so you give up. I was told for months the Tax Payer Advocacy could not help me unless my home was in foreclosure. They are now denying me because my parents have a life estate on their home. So they are saying I owned a primary residence which I didn't! I don't know where to turn anymore.

Anonymous said...

I purchased my new home 5/31/08 a brand new home for my son and I so excited. Went on Turbo tax and they ask you questions did you purchase a home "yes" then it takes you to a form to file out the date of purchase etc... my return was excepted and I received my 7500.00 refund. I have to start paying it back this year and today I get in the mail from the IRS that I need to prove this is my permanent address and HUD forms etc...I am so upset. Even more so hearing how incompetent they are with the pprwk and that it may hold up my receiving a refund this year which I really need. They managed to turn a happy event into a very scary and frustrating one.

ywill said...

I just got off the telephone with my taxpayer advocate's supervisor. ...she hung up on me after telling me it takes 120 days to get an answer. We have been told several lies about not having HUD statements, not being eligible...then we were elgible but wait 8-16 weeks.. then after 8-16 wks they recommend an advocate then adocate says we got selected for an audit then another 120 days...and other stall tactics. We closed on 3/29/10 and applied right away in April. We have had 3 advocates with no help. I will fax call these folks everyday until somebody gives me some answers! Congressman, Obama, Ruth to the Rescue!!!!

NYC low income housing said...

This will help a lot for the first time home buyer. They can use the money to pay easier the house that they want to buy.

Anonymous said...

The IRS is utterly incompetent. We've been waiting for our return since Feb 2010, it's July 2011 now. Every month they send us a new letter stating it will be another month. Maybe we should fix the debt issues by firing all of the workfare workers! Another Obama "shovel ready" failure!

Anonymous said...

My daughter had a letter stating she should have her refund by Aug 10th as she was approved. She has called numerous times. She got an advocate today/ She is in dire need of that money. Wonder what the problems is? She has sent numerous forms and all kinds of things in.

Tiago said...

Governments have many possibilities to rocket the real estate market but when this policies doesn´t work the hole system looses his credibility.
I prefer investing abroad, I have contacted a top real estate agents in sidney and bought my home there where the market is much solid.