Nearly 1,300 prison inmates wrongly received more than $9 million in tax credits for homebuyers despite being locked up when they claimed they bought a home, a government investigator reported Wednesday.
The investigator said 241 of the inmates were serving life sentences.
In all, more than 14,100 taxpayers wrongly received at least $26.7 million in tax credits that were meant to boost the nation's slumping housing markets, said the report by J. Russell George, the Treasury Department's inspector general for tax administration.
Some taxpayers received the credit for homes purchased before the tax break was started. In other cases, multiple taxpayers improperly used the same home to claim multiple credits. Investigators found one home that was used by 67 taxpayers to claim credits.
"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 says it is taking steps to get the money back. The agency noted that more than 2.6 million taxpayers claimed the tax credit through April — claiming $18.7 billion in credits — with only a tiny fraction going to prison inmates or other scofflaws.
"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."
The report blemishes an otherwise popular tax break that was sweetened once by President Barack Obama's economic recovery package and again when Congress extended it into the spring. The National Association of Realtors says the tax credit has generated 1 million new home sales that wouldn't have happened otherwise.
"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."
Congress started the first-time homebuyer tax credit in 2008, providing couples up to $7,500 that had to be repaid, free of interest, over 15 years. The credit was essentially an interest-free loan.
Last year, Obama and Congress upgraded the credit significantly, increasing the top amount to $8,000 and ending the requirement that it be repaid.
George's report targets taxpayers who claimed the first-time homebuyers tax credit under these two programs. Since then, in November, Congress expanded the tax credit to existing homeowners, offering up to $6,500 to longtime owners who bought new homes.
The latest program is about to expire. Homebuyers had to sign purchase agreements by April 30 and close by June 30, though there is a movement in Congress to extend the closing deadline until Sept. 30.
The IRS said it has aggressively enforced the tax credit, blocking nearly 400,000 questionable claims and opening more than 150 criminal investigations.
"These aggressive efforts have saved taxpayers more than $1 billion," the IRS said in its statement.
Nevertheless, 1,295 prison inmates were able to get $9.1 million in credits, in part because the IRS does not keep up-to-date records of who is in prison, the IG's report said. None of the inmates filed joint returns, so the claims could not have been for purchases by spouses.
The IRS said that while many prisons voluntarily provide information about inmates, they are not required to do so.
"When IRS has reliable data, we do a very effective job of using it to ensure compliance," IRS spokesman Frank Keith said. "When IRS does not have reliable data, it is a much more difficult process for us."
The IRS is asking Congress to enact legislation to ensure that the agency gets up-to-date inmate information, Keith said. In the meantime, the IRS plans to reach out to local, state and federal prison officials to start a task force to improve information-sharing on inmates.
The IG report estimates that 2,555 taxpayers wrongly received $17.6 million in tax credits for homes that were bought before the credit was enacted.
An estimated 10,282 taxpayers wrongly received credits for homes that were also used by other taxpayers to claim the credit. Investigators were unable to quantify the amount of money they received, "but all indications are that the total will be in the tens of millions of dollars," the IG's office said in a statement.
Investigators also found 87 IRS employees who may have improperly claimed the credit, though the review was ongoing.