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 — but don't try to play games with the credit.
The IRS has 24 criminal investigations of suspected fraud under way across the country. It has executed seven search warrants, and last month a tax preparer in Jacksonville entered a guilty plea on federal charges of fraud in connection with the first-time buyer credit. James Otto Price III is awaiting sentencing and faces up to three years in prison, a $250,000 fine, or both.
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 temptations for dishonest taxpayers.
Claiming the credit looks so easy: 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 in 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? Apparently, the IRS is. 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 homebuyer credit."
The IRS won't discuss the nature of the screening, but it's clear from the number of investigations that claims for the credit are getting special scrutiny.
In the case of the Jacksonville man, one tipoff was the sheer number of clients who claimed credits as first-time buyers. Price 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 he met with a client who told Price she didn't plan to 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 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 any ongoing criminal investigations. 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:
• If you co-purchase the home with your spouse, both of you must meet the first-time homebuyer requirements.
• The house cannot be acquired through an inheritance or a gift.
• You cannot finance the house through a tax-exempt mortgage bond program.
• You cannot make more than $95,000 of modified adjusted gross income for singles, $170,000 or more for married joint filers.
• 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.
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. But beware of slick-talking professional tax preparers who tell you that you do.
Ken Harney can be reached at firstname.lastname@example.org.