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Death, no; but taxes, you could cheat

by Ryan Craggs
Feb 04, 2010


Related Links

The TIGTA reportFirst-Time Homebuyer tax credit claim detailsRecovery.gov

Key tax credit facts and figures

  • The 20 Individual taxpayer provisions total $252 billion
  • The 36 Business provisions total $74 billion
  • As of July 25, officials say, 73,799 taxpayers may have incorrectly claimed the first-time homebuyer credit
  • Those potentially incorrect claims amount to $504 million
  • Congress appropriated $203 million to oversee the administration of these tax provisions
  • The Treasury Inspector General for Tax Administration, a watchdog arm of the Treasury, was given $7 million to oversee and audit the IRS’ work with the Recovery Act

Getting money you don't deserve

First step to getting money you don’t deserve: Pick a tax credit.

Let’s run with the First-Time Homebuyer Tax Credit. Qualifying involves a number of restrictions and guidelines. But the biggies: It must be your first home purchase, and the credit will equal 10 percent of the home’s value, up to $8,000.

So let’s say you buy a home for $70,000. In a rough housing market, a smart buyer can get a lot of house for that kind of money. You’ll get a $7,000 credit if you play by the rules. You know, if you play by the rules.

But since you’re filing a paper tax form, let’s say in a tornado of paperwork, that $70,000 “accidentally” becomes $80,000 on your tax documents. Could be a mistake. Could be intentional. But turning that seven into an eight would equal an extra $1,000 credit if it slips by the IRS.

Hypothetically speaking.

You can buy a flatscreen for your new living room with that kind of money.

You know, hypothetically speaking.

The point here is that without the proper system in place, the IRS cannot check on all the forms filed.

Limitations of the e-file system prevent the IRS from transferring paper documentation to electronic format, and while the IRS has been granted more authority in monitoring the credit, it isn’t clear how much authority it has in policing all the credits associated with the Recovery Act.


Want to cheat on your tax returns?

It’s not like the Internal Revenue Service can do a lot to stop you from cashing in on stimulus tax credits.

According to a report filed by the Treasury Inspector General for Tax Administration, the IRS is “unable to verify eligibility for the majority of Recovery Act benefits at the time a tax return is filed.”

So much for transparency efforts in stimulus spending.

“It’s a question of how much burden the IRS wishes to place on the taxpayer,” said Treasury Inspector General for Tax Administration J. Russell George. “The IRS relies on taxpayers to provide correct information, which in most instances includes reporting accurately and only the tax credits they qualify for.”

In an attempt to streamline tax filing, the IRS promotes use of its online e-file system, which cuts down on paper filings and allows computers to do math checks. The IRS wants as many taxpayers to use this system as possible.

It becomes a problem when efficiency and thoroughness do not coincide. For example, the inspector general recommended that the IRS require taxpayers to provide documentation to verify first-time homebuyer credit claims, but the IRS said no. Such a requirement, officials said, “would be burdensome and would potentially exclude as many as 2 million taxpayers from electronically filing.”

It wasn’t until the Worker, Homeownership and Business Assistance Act of 2009 was signed into law on Nov. 6 that additional documentation was required for the credit and the IRS was given additional authority with respect to returns that did not include that documentation.

Moreover, the IRS did not have math error authority – meaning that officials are not authorized to check calculations – to stop payment of erroneous credit claims. In essence, the IRS relied on taxpayers to be honest, didn’t require hard documentation and could not check the math on certain credits.

When questioned about how it is ensuring that money is going to the right people and in the right amounts, the IRS responded: “While we cannot go into detail about our audit techniques, we do review tax returns and look for inconsistencies or patterns in the way people are filing. For any credit or deduction claimed on a tax return, we look at the information provided by the taxpayer. If it is not sufficient to support the claim, we contact the taxpayer to obtain additional supporting documentation.”

The problem stems from the difficult balance between transparency and privacy. President Obama’s administration has promised transparency, but starting with the Watergate scandal in the 1970s, an increasing number of roadblocks have been installed to protect sensitive private information.

“It’s a fine line the IRS has to traverse in complying with the law,” George said.

This year differs little from any other in how the IRS reviews tax returns.

But with the sheer number of new credits and unprecedented cash available, it brings into question how effectively the IRS is watching over where the money goes. Policing the distribution of money is new to everyone.

“No question the IRS has issues it needs to address to operate more effectively and more efficiently,” George said. But he added: “In terms of recovery, it seems they are doing what is required by Congress and the law.”