Bloomberg - by Richard Rubin

The Internal Revenue Service issued millions of dollars in questionable refunds under a tax credit program for first-time homebuyers, a federal audit found.

The report released by the Treasury Inspector General for Tax Administration found that some taxpayers received multiple refunds for the credit. Others used amended tax returns to change the date they reported buying a home from 2008 to a later year so they could receive a version of the credit that didn’t require repayment to the government.

“While in response to our previous recommendations the IRS took a number of positive steps to process homebuyer credits claimed on amended returns, this report found additional issues related to the credit,” J. Russell George, Treasury inspector general for tax administration, said in a statement.

As the housing market struggled in 2008 and 2009, Congress passed homebuyer tax credits designed to spur purchases. The program, which expired last year, gave homebuyers up to $8,000 in refundable tax credits. Taxpayers have claimed more than $30 billion under the program, the IRS said in a statement today.

The audit noted another problem with amended returns. Congress allowed taxpayers who purchased homes in 2009 or 2010 to amend their tax returns for the prior year and receive immediate refunds for the $8,000 credit. The IRS, following the law, paid taxpayers interest on overpayments, meaning that some earned interest on credits for the period between April 15 and the dates they bought their homes.

‘Significant Challenges’

The IRS paid taxpayers about $37 million in interest on credits before they had purchased their homes, according to the audit. The agency officials should have asked Congress to clarify its intent about interest payments, it said.

In the IRS response to the report, Richard Byrd, who heads the wage and investment division, said the agency has had “significant challenges” in dealing with the homebuyer credit and with amended returns.

The IRS agrees with the audit’s recommendations, it said in a statement released today.

“Where there have been questionable claims, the IRS has moved aggressively, closing almost 450,000 examinations and saving taxpayers more than $1.4 billion,” the statement said. “This includes examination of more than 225,000 amended returns where over $820 million was protected. The IRS continues to audit claims, including amended claims, as warranted and recapture credits that were improperly paid.”

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net