Review finds more than $27 million in fraudulent tax credits

More than 14,000 taxpayers wrongly received nearly $27 million in homebuyer tax credits to prop up the sluggish market, according to a government report. 

Nearly 1,300 of those taxpayers were locked up in prison — 241 serving life sentences — and received more than $9 million in fraudulent claims, according to a report released Wednesday by J. Russell George, the Treasury Department's inspector general for tax administration.

"Last year, we learned that children and persons who did not purchase homes were fraudulently claiming the first-time homebuyer credit," said Rep. John Lewis (D-Ga.), chairman of the House Ways and Means oversight subcommittee. "Although I am pleased that the fraud identified earlier does not continue, I am concerned about prisoners claiming the credit."

Not only were multiple claims allowed — 67 claims alone for one home — $17.6 million in claims totaling 2,555 people were allowed for homes purchased before the law went into effect.

The homebuyer tax credit has spurred more than 2.5 million new home purchases during the recession and the fraudulent claims are a small number compared with the total, assistant Treasury Secretary Michael Mundaca said in a statement sent to The Hill. 

"These fraudulent claims, which are being pursued to the fullest extent of the law, represent less than half a percent of the credits paid out under this program," Mundaca said. "As with all new and expanded programs, we are constantly working to improve implementation, and the IRS has already begun to take additional steps to prevent fraud in this program.”

More than 10,000 taxpayers wrongly received tax breaks for homes claimed by others, estimated in the the tens of millions of dollars, the report said. 

"This is very troubling," George said. "Congress created and modified the homebuyer credit to stimulate the economy and help taxpayers achieve the American dream, not to line the pockets of wrongdoers."

The Internal Revenue Service is trying to get the money back. The IRS processed more than 2.6 million taxpayer claims worth $18.7 million through April, with only a few fraudulent claims. 

"A very small number of payments were made to prisoners incorrectly, which the IRS is now taking all steps to recapture and to prevent going forward," the IRS said in a statement. "The IRS will follow up on every instance of an improper prisoner payment and take swift and appropriate enforcement actions."

So far, the IRS says it has stopped about 400,000 potentially fraudulent claims. 

"These aggressive efforts have saved taxpayers more than $1 billion," the IRS said.

The report doesn't paint a rosy picture for a tax credit that was pushed by the National Association of Realtors and gave the housing market some life. 

The first-time homebuyer tax credit was put into place in 2008, giving couples up to $7,500 that had to be repaid over the course of 15 years and was considered an interest-free loan. 

The tax credit was changed last year, increasing the amount to as much as $8,000 and eliminating the repayment requirement. Starting in November, Congress also allowed previous homeowners to receive a credit of up to $6,500. The tax credit expired April 30. 

Homebuyers must close by June 30 but Congress is pushing for a three-month extension until Sept. 30. 

The report examines the tax credit under both programs. 

This story was updated at 4:06 p.m.