Incarceration was no barrier to the prison inmates who successfully claimed $9.1 million worth of fraudulent first-time homebuyer credits from the Internal Revenue Service in 2009, according to a Treasury Inspector General for Tax Administration audit released June 23.

Home buyers who bought a house for the first time between April 8, 2008 and April 30, 2010 can take advantage of federal incentives such as interest free loans or an outright tax refund. While imprisonment isn't an automatic disqualification for the homebuyer credit, TIGTA statistical analysis finds that the IRS allowed at least 1,295 prisoners to gain a tax credit in their 2008 tax returns despite being in the gaol during the time in which they allegedly purchased houses.

Auditors note that the IRS did start matching its database of U.S. prisoners against tax returns starting in May 2009, but even then some prisoners still could successfully claim a credit by dint of not appearing in the database, the audit finds.

The IRS each year reconstructs from scratch its prisoner database from information voluntarily submitted by prisons; the tax agency hasn't made it a policy to compare prisoner lists from one year to the next to ensure that prisoners with multi-year sentences are consistently accounted for, the report states.

In fact, in a statistical sample of 86 prisoners filing fraudulent homebuyer credit claims, 74 were first put into prison in 2007 or earlier.

Inmates weren't the only individuals falsely claiming the homebuyer credit, however. Auditors found that 18,832 taxpayers managed to claim credits on a mere 7,695 addresses, gaining in the process $134 million in fraudulent tax credits. In the majority of cases, the IRS simply paid the credit without scrutinizing the claims.

Even IRS employees got in on the action; TIGTA has so far identified in this and previous audits 87 tax agency workers who have wrongly claimed homebuyer credits.

In the tax agency's official response to the audit, Richard Byrd, commissioner of the wage and investment division, noted that over $1,8 million taxpayers have claimed over $12.6 billion worth of first time homebuyer tax credits and has denied 285,504 claims.

"Given the complexity of tax administration and the time constraints the IRS is faced with in implementing legislation, it would be impossible for us to either stop or address every potentially erroneous claim," he added. He also said that without a Congressional mandate that prisons must report their inmate data to the IRS, "there will be gaps in the data."

Nonetheless, the IRS said it agreed with all TIGTA recommendations and will seek to improve operations.

For more:
- read the TIGTA report 2010-41-069 (.pdf)

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