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08/02/09: The IRS Is Watching

Housing Counsel

By: Benny L. Kass

James Otto Price, III, pled guilty last week and faces the possibility of up to three years in jail, and a fine of $250,000. What was his crime? He is a tax preparer in Florida and falsely assisted a client in claiming the first-time homebuyer credit on his federal income tax return.

According to the Internal Revenue Service, they have 24 criminal investigations pending in pursuit of potential instances of fraud involving this credit. And the IRS is not letting up. “We will vigorously pursue anyone who falsely tried to claim this or any other tax credit or deduction,” said Eileen Mayer, Chief of the agency’s criminal investigation.

The First-Time Homebuyer credit is one of the stimulus packages enacted by Congress. Although the rules differ depending on when you bought that first home, you can – if you qualify – get a credit of $7,500 or $8,000 dollars when you file your income tax return.

For home purchases between April 9 and December 31, 2008, (other than in the District of Columbia) the credit is really only a 15-year interest free loan in the amount of $7,500. When you file your tax return in the second year after claiming the credit, you must begin the repayment. For example, if you took the full credit, you have to start paying the IRS $500 each and every year. If the house is sold before 15 years, in most situations you will have to pay the balance of that “loan”. However, if you sell to a party not related to you, the loan payment – called “recapture” – is limited to the amount of gain on that sale.

Congress recognized that a full credit is better than a loan, and this year it modified the terms of the credit. The credit is now up to $8,000 and there is no recapture requirement.

If you purchase (or have already bought) a home between January 1- December 1, 2009, you may be eligible for this amended credit. There are income limitations, however. Single taxpayers with incomes up to $75,000 – or married couples up to $150,000 -can qualify for the full credit; it is phased out when your income reaches $95,000 for singles or $170,000 for married folks filing a joint tax return.

To qualify, the residence must actually be purchased within the time limits discussed above. If you are buying a new house under construction, you must physically occupy the property by December 1 in order to qualify.

But keep in mind that this must be a “first-time” home. That means that you cannot have owned another principle residence within three years prior to the date of the new purchase. Vacation homes and rental properties do not qualify. Furthermore, if you buy your home from a close relative – which includes your spouse, parents, grandparents child or grandchild – you cannot obtain the credit. Strangely, however, if you owned a primary home outside of the United States, this will not disqualify you.

Our income tax returns for 2008 were due this past April 15th. However, many consumers have taken advantage of the automatic extension and have until October 15th in which to file – although you still had to pay the projected tax back in April. It is not to late to claim the credit by including IRS Form 5405 with your tax return. Or if you have already filed, you can file an amended tax return. You have to consult your tax advisors on the pros and cons of this.

How does the IRS confirm that you really are a first-time home buyer? Although the Service will not disclose all of its techniques, it does get information from your own tax returns and from third-party information. According to the IRS, it has “a number of sophisticated computer screening tools to quickly identify returns that may contain fraudulent claims for the first-time homebuyer credit.”

This credit has clearly stimulated the home-buying market. But it has also encouraged fraudulent practices. The law is complex and will impact people in different ways. If you have questions, you can get a lot of helpful information directly from the IRS (, type in “first time homebuyer”) or from you tax advisors.

You don’t want to join Mr. Price.

– Boilerplate –