As I noted in yesterday's post on tax fraud committed in connection with the first-time home buyer credit, the House Ways and Means Oversight Subcommittee met this morning to hear suggestions on ways to reduce such evasion.
Three witnesses went before the subcommittee. Here are some excerpts from their prepared remarks. I copied most of the comments directly from the public testimony, but did try to add some transition and clarification. And I think I spelled out most of the acronyms!
J. Russell George, Inspector General
Treasury Inspector General for Tax Administration (TIGTA)
During the 2009 Filing Season, the IRS implemented computer programming to reject claims electronically filed with a future purchase date. Controls were also implemented to identify and disallow claims filed on paper tax returns with future purchase dates.
However, at the time we completed our report, the IRS had not decided whether to go back and review or correct the more than 19,300 electronically filed tax returns with future purchase dates or try to identify paper returns meeting the same criteria that may have been processed before controls were put into place.
According to the IRS, the filters and controls they put into place to identify post-refund erroneous claims should identify all erroneous claims, including those with home purchase dates in the future.
The IRS’s plans to address this issue are not adequate. The IRS’s filters will allow some taxpayers the use of money to which they were not entitled, and may never be entitled. In addition, the criterion used by the IRS will not ensure that a home purchase was made.
We recommended that the IRS initiate actions to determine whether those 19,300 taxpayers known to have claimed the Credit for a future home purchase have actually purchased a home. If not, steps should be taken to recover the erroneous Credits.
The IRS agreed with this recommendation. The IRS has identified the issue of taxpayers claiming the Credit for future home purchases as an important element of the overall examination and compliance plan. The IRS agreed to flag these tax returns for necessary follow-up with the taxpayers involved.
More of George's analysis and recommendations can be found in his full testimony.
Linda E. Stiff, IRS Deputy Commissioner
for Services and Enforcement
Faced with the administrative challenges of implementing two first-time home buyer credit (FTHBC) provisions during 2009, for either the 2008 ($7,500) or 2009 tax year ($8,000), the IRS developed robust outreach and compliance strategies.
The IRS recognizes that there is potential for both fraud and errors whenever a new refundable tax credit like the FTHBC is enacted. As we began implementing this credit in the days after the Recovery Act legislation was passed, we also identified different types of potential erroneous or fraudulent claims, and matched our compliance program to those abuses. We will vigorously pursue those who filed fraudulent claims for the credit, and have already opened up scores of criminal investigations. We have selected thousands of returns for those claiming the credit for civil examination.
Administering the FTHBC poses challenges similar to those the IRS confronts with other refundable credits -- namely, it has a number of eligibility rules and the Federal government lacks third-party data sources which can be used to verify taxpayers’ eligibility for the credit.
It is important to put the administration of the FTHBC in context of the overall tax filing process. The expanded credit available under the American Recovery and Reinvestment Act (ARRA) came in February -- a time when the IRS processes tens of millions of tax returns filed during a peak month. In fact, during February 2009 alone, we received almost 44 million returns for processing. And the majority of the 1.5 million returns claiming the FTHBC, just over 1.1 million, were filed between January and May 2009. It was important that the IRS implement and administer the FTHBC in a way that did not disrupt the annual tax return filing process.
The IRS has already identified over 160 potential schemes resulting in scores of criminal investigations. We have also selected more than 100,000 returns claiming the FTHBC for examination. We anticipate reviewing the audit results to refine our filters even further. The FTHBC has helped over a million American families purchase homes, and we cannot let fraudulent activity undermine a program that has benefited so many.
You can check out Stiff's additional thoughts and analysis of how the IRS dealt with the credit in her full testimony.
James R. White, Director, Tax Issues,
Government Accountability Office
White noted many of the same IRS challenges that Stiff discussed, specifically that the agency had to "balance quick implementation of the FTHBC with enforcement of the laws' requirements."
The new credit posed significant challenges because claims of the 2008 and 2009 versions occurred in conjunction with other multifaceted (yeah, that's a nice way of saying overly convoluted!) tax law changes.
To meet the filing needs of first-time credit claimants, the IRS:
Issued a new form, the Form 5405 -- ”First-Time Homebuyer Credit” -- and new instructions for the Form 5405, and revised other related forms and instructions;
Communicated with taxpayers and tax return preparers through a variety of avenues, such as news releases, postings on irs.gov, podcasts, and YouTube videos; and
Made computer programming changes to enable processing for paper and electronically filed returns. For example, the 2009 credit required programming changes to accommodate the differences in the eligibility rules for the 2008 and 2009 credits.
But assuring compliance is a challenge because the IRS did not require substantiation, either by the taxpayer or from a third-party source, to validate the information on the Form 5405. For example, IRS decided that requiring taxpayers to attach supplemental documentation about a home sale to a tax return would be burdensome.
Further, according to IRS officials, IRS does not have the ability to accept such documentation electronically, which could impede taxpayers’ ability to file tax returns electronically.
To reduce IRS’s reliance on costly and burdensome audits, in a recent report GAO suggested Congress consider providing IRS with additional legislative authority known as math error authority (MEA). MEA allows IRS examiners to identify calculation errors and check for obvious noncompliance, such as claims above income and credit limits. IRS then corrects these errors during tax return processing, avoiding the need for audits.
The IRS already has this ability in connection with some tax provisions, but math error authority must be granted by statute for specified purposes. GAO had recommended that Congress give consider giving IRS math error authority to automatically verify taxpayers' compliance with the first-time home buyer credit payback provision and ensure that taxpayers do not improperly claim the credit in multiple years.
It is too early to tell whether IRS’s enforcement actions and the proposed new legal authorities will be enough to protect federal revenue. Because of the complexities and multi-year compliance issues associated with the credit, along with the potential for significant burden on taxpayers, continued oversight of IRS’s enforcement efforts will be necessary.
Additional GAO findings and recommendations are detailed in White's full testimony.
Other coverage: If you don't have time (or the inclination) to read all the testimony, you can check out the media and blog reports on the hearing by the Associated Press, New York Times, USA Today/Reuters and the Wall Street Journal blog Developments.