We have seen several issues related to the new homebuyer’s credit. The first problem that we experienced was legitimate credits denied without further substantial proof being submitted to the IRS. The main reason this happened was due to rampant fraudulent claims. The most recent issue is the systemic failure of the IRS to properly treat the $8,000 credit for those that purchased a home in early 2009. This credit did not have to be repaid but the IRS has many of these in the system as repayable credits.
To get to a basic understanding of what we are now seeing let’s look at the history of the “New Home Buyer’s Credit”.
FIRST: The Housing and Economic Recovery Act of 2008 established a tax credit for first-time homebuyer’s that can be worth up to $7,500. For homes purchased in 2008, the credit is similar to a no-interest loan and must be repaid in 15 equal, annual installments beginning with the 2010 income tax year. These were to be claimed on the 2008 tax return.
Second: The American Recovery and Reinvestment Act of 2009 expanded the first-time homebuyer credit by increasing the credit amount to $8,000
for purchases made in 2009 before Dec. 1. The Worker, Homeownership and Business Assistance Act of 2009 extended the deadline — taxpayers who had a binding contract to purchase a home before May 1, 2010, became eligible for the credit. Buyers must have closed on the home before July 1, 2010. That closing deadline was extended to Sept. 30, 2010 by the Homebuyer Assistance and Improvement Act of 2010, enacted July 2, 2010. This credit could be filed in 2008 or 2009 depending on the purchase date.
Problem 1: There was rampant fraud associated with the new homebuyer’s credit. As a result, the IRS tightened up substantially on their screening process and this caught many legitimate credits and delayed them until further documentation could be submitted. Typically we would see new construction, or purchases of homes that the taxpayer had occupied on prior returns under a rental agreement get an extra scrutiny. The IRS would send a laundry list of items they required and often we would have very few of the things they require because local building codes did not require things such occupational licenses.
Soultion 1: You simply have to be diligent, document, and get them the best documentation you can get. Do not rely on any advice provided by the IRS unless they are willing to put it in writing. We have had a great deal of success in resolving these issues.
PROBLEM 2: Credits for 2009 purchases claimed on a 2008 return are in the IRS system to begin repayment with the 2010 filing year. THESE CREDITS DO NOT HAVE TO BE REPAID. Apparently the IRS has a systemic problem (your problem not theirs if you are in this group of taxpayers) that treats all 2008 returns as credits to be repaid and they are sending out notices and refusing 2010 returns that do no include the repayments.
TO MAKE THINGS WORSE: We are getting various erroneous advice from the IRS telephone support about the proper process to correct their error. Answers range from “Amend the 2008 return” to “We have corrected here” (without requesting documentation).
Solution 2: Our best response to date has been to get a human on the phone that will then request the original information to provide proof of purchase date and then that person has made the correction. It takes approximately 2 weeks for the system to update which will allow the taxpayer to file a correct 2010 return excluding repayment of the credit. If you are in this group of people all you can do is take the action to have your credit properly adjusted by the IRS and then wait so that you can submit a correct 2010 tax return that does not begin repayment of the credit.
If you have a first time homebuyer’s credit issue, and need help in resolving your problems, we have been very effective in getting them resolved. So, give us a call and have an advocate go to work on your behalf.