Fraud could undermine housing tax credit

By J. Patrick Coolican, Lisa Mascaro

Friday, Oct. 23, 2009 | 2 a.m.

Nevadans have responded to the government’s offer of up to $8,000 in first-time-homebuyer tax credits with gusto, filing more claims and receiving more in tax breaks per capita than residents of any other state.

Nevadans have claimed $146 million in tax breaks from the credit.

But according to new federal reports released Thursday, the program nationwide is littered with potential fraud, threatening its future.

Claims for the tax credit are being filed by those who may not be first-time buyers, those who haven’t yet bought houses, and those who are under 18, according to an inspector general’s report. More than $500 million in claimed credits are being questioned.

The Internal Revenue Service has opened 115 criminal investigations, has frozen more than 110,000 refunds pending further examination and is stepping up audits of questionable claims.

A tax preparer was sentenced to federal prison this week for filing fraudulent returns — the first in connection with housing tax credit fraud.

The findings come at a crucial time for the popular program. Congress is considering extending the tax credit, which expires Nov. 30, and possibly expanding it, to prop up the housing market and nudge along an economic recovery.

Nevada’s real estate and building professionals, and their colleagues nationally, have urged an extension of the credit, believing it has moved inventory and helped to keep plummeting home prices from falling further.

Even as economists have cautioned that continuing the credit could simply reinflate the bubble, Nevada’s elected officials in Washington largely support its extension, believing the situation in Nevada is so dire that the assistance is needed.

The new findings could cool support for a program that already faces questions in Washington.

This week the Housing and Urban Development secretary, Shaun Donovan, declined to say whether the administration would support the extension because it is still weighing the costs. The Government Accountability Office reports that $10 billion had been spent on 1.4 million credits as of late August.

As the economy hit trouble in 2008, Congress passed a $7,500 tax credit for first-time homebuyers as a no-interest, long-term loan to stimulate the housing market. The credit was expanded under the economic recovery act passed in February to $8,000, not as a loan, but a fully refundable credit.

Economists worry that the tax break is going to those who would have purchased homes anyway, and filling homes by vacating others — as renters become buyers — without benefit to the economy as a whole.

Estimates are that more than three-quarters of the expected 1.5 million taxpayers who will have tapped the program would have bought homes even without the tax credit, putting the price to the government at about $43,000 per homebuyer who would not have bought a house without the credit.

The Government Accountability Office reports that 59 percent of those claiming the credit earned less than $50,000 annually and 84 percent went to those earning less than $75,000.

The Treasury Inspector General for Tax Administration raised red flags early, alerting IRS officials that “key controls were missing” as the IRS began handing out the credit.

Inspector General J. Russell George testified before a House Ways and Means subcommittee hearing Thursday that based on his review of the program:

• More than 19,300 tax returns for 2008 had taxpayers claiming the credit for “a home which had not yet been purchased.”

• Nearly 74,000 claims for the credit, totaling more than $500 million, were submitted by taxpayers who may have previously owned homes — including some IRS employees.

• More than 580 taxpayers younger than 18 years old claimed almost $4 million in credits.

The inspector general’s report said 3,200 claims, totaling $20.8 million, were filed by those with individual taxpayer identification numbers often used by resident immigrants. Some of the immigrants may be here illegally; the law specifically forbids them from receiving the credit.

The Internal Revenue Service testified that it has halted refunds in questionable cases and instituted filters to catch claims being filed by those who are underage or had previously owned homes.

Linda Stiff, the IRS deputy commissioner for services and enforcement, testified that 160 potential fraud schemes have been identified and criminal investigations are under way.

The IRS could not immediately say how widespread the potential fraud was in Nevada.

Given the history of rampant mortgage fraud here, abuse of the program seems likely.

Several of Nevada’s lawmakers in Washington remain committed to extending the tax credit, believing it is playing a key role in stopping the slide of Nevada’s troubled housing market and is vital for the state’s recovery.

“This is something we want to get done to help strengthen Nevada’s economy,” said Jon Summers, a spokesman for Senate Majority Leader Harry Reid.

The housing market in Southern Nevada is in considerable flux, with lots of sales activity, but also a continuing wave of foreclosures.

Analysts have divergent views about the state of the Las Vegas-area market, where the median home price has fallen by more than half to $127,000 from its 2006 peak.

With unemployment in Clark County reaching nearly 14 percent, thousands of residents here are unable to make their mortgage payments. September foreclosures were up 5 percent from August.

Michael Helmar, the Nevada analyst for Moody’s Economy.com, said there are simply too many foreclosures flooding the market, which will push prices lower.

Moody’s predicts home prices will decline another 24 percent from mid-2009 to mid-2010.

But one local analyst, Larry Murphy of SalesTraq, disagrees with the dour report and is saying for the first time since the crisis began that he thinks prices have hit bottom — though he says there won’t be upward movement for a year.

“The worst is behind us,” Murphy said. “We can make a strong case that says the Las Vegas housing market has overcorrected.”

Murphy calls the housing tax credit a helpful stimulus but not a long-term solution.

“It’s like a can of Red Bull,” Murphy said.

Democratic Rep. Dina Titus says the tax credit has played a significant role in helping to stabilize housing prices and move homes off the market in her Southern Nevada district, which is among the nation’s hardest hit by the foreclosure crisis.

“Extending this tax credit is an important step in addressing Nevada’s foreclosure crisis and turning the housing market around,” Titus said. The congresswoman is signing on to a bill introduced Thursday by Rep. John Lewis, D-Ga., chairman of the House subcommittee investigating the issue, to tighten oversight.

Lewis’ bill would require those claiming the credit to attach verification of their home purchase with their tax returns, set a minimum age of 18 to claim the credit and give the IRS greater authority to determine eligibility.

“I continue to support extending the tax credit and believe we must increase oversight in order to root out any fraud or abuse that is occurring,” Titus said.

“There is no question that we must do a better job stopping fraud and prosecuting those who break the law,” said David Cherry, spokesman for Democratic Rep. Shelley Berkley. “But the congresswoman is confident that these needed steps can be taken at the same time as Congress moves to extend this tax credit that she so strongly supports.”

Coolican reported from Las Vegas.