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First-time homebuyer credit still causing compliance problems

While the first-time homebuyer credit helped some folks get into a home, it has been an unmitigated disaster for the Internal Revenue Service.

It's not necessarily the IRS' fault. The changes to the credit, from the amount available (originally $7,500 that was increased to $8,000 along with $6,500 for some not so first-time buyers) to the payback vs. real credit conditions to the many deadline dates, also caused problems for taxpayers.

The IRS had to deal with those confused and often frustrated home-buying taxpayers. And sometimes it didn't do such a good job, according to a recently released report from the Treasury Inspector General for Tax Administration (TIGTA).

While data in First-Time Homebuyer Credit Repayment Notices Were Incorrect, and the Method Used to Identify Dispositions Is Unreliable (report #2011-41-097) found that the IRS accurately issued most of the more than 5.2 million notices informing taxpayers of the need to repay the credit, some slipped through the cracks.

TIGTA reports that the IRS issued incorrect notices or did not send notices to 61,427 households due to programming errors or incorrect information on tax accounts. And that amount is this week's By the Numbers figure.

61427 first time homebuyer credit notice problems

Breaking it down further, TIGTA found that that of the 61,427 households:

  • 12,495 individuals were notified that they did not have to repay the homebuyer credit, when in fact they did have a repayment obligation.
  • 27,728 taxpayers were notified that they had a repayment obligation despite having purchased their home in 2009 (only 2008 purchases have a repayment obligation).
  • 2,152 individuals who bought their house in 2008 were incorrectly notified that they did not have a repayment obligation unless they sold their house.
  • 18,220 did not receive a notice reminding them of their repayment requirement.
  • 832 deceased individuals may have been sent an incorrect notice regarding repayment.

Additionally, TIGTA found that the information provided by a vendor hired by the IRS to use third-party data to identify individuals who may have disposed of their principal residences was unreliable. This resulted in 53,558 individuals incorrectly receiving notices to repay the homebuyer credit.

To help alleviate some of the problems, the IRS plans to replace some of its notices with an online tool that taxpayers can use to find out their homebuyer credit repayment status. The option should be available to taxpayers for the 2012 filing season.

Symptoms of a larger problem: So why are problems with 61,427 homebuyer credit claims out of more than 5 million important?

First, in dealing with taxpayer money and obligations, the IRS needs to get it correct in each and every case.

But from a larger perspective, the problems the IRS and taxpayers continue to encounter in dealing with this tax break underscore the lunacy of creating such short-term tax laws for specific situations.

The many problems that this tax break created are no surprise. Yet Congress kept tweaking the provision, increasing the confusion and complexity.

It was a stupid law from the get-go, prompted by the powerful housing industry lobby.

The tax credit, or faux credit in its original form, might have gotten a few folks into a house, but it's done nothing to stabilize home prices or improve the national home buying market.

But this tax year and for the next 14 years, we'll all be paying the price, either as taxpayers repaying the original $7,500 tax break or as taxpayers who have to cover additional IRS operation costs of making sure the credit is repaid or as taxpayers who end up making up missed homebuyer credit taxes that aren't correctly collected.

As we head into an election year in which the housing sector is still stumbling, there's a possibility that Congress might be tempted to do some more favors for the real estate industry.

Note to Representatives and Senators: Don't you dare!

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When I filed this past Feb. 2011, turbotax had all the info correct including the $500 I owed for this credit. About 6 weeks after filing, we get a letter from the IRS saying we filed wrong, and we're owed $500 extra back. I called the IRS and they said that they were right, not to be concerned. Now in Dec. I get a letter saying that we owe the tax that I tried to pay 10 months ago, plus the $10.12 in interest that has accrued due to their mistake.

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