The government offers two types of tax credits. The first type reduces your tax liability, but the second type -- called a refundable credit -- allows you to wipe out your taxes owed and get cash from the government. It comes as no surprise that the Homebuyer Tax Credit program which is a refundable credit is plagued with fraud.
My friends, I have been a CPA for over 30 years so please let me share a basic principle with you: Whenever there is a refundable credit, fraud is not far behind – and the Homebuyer’s Credit program is no exception. The fact that a four-year-old took advantage of the program provided great entertainment. To nobody’s surprise, 53 IRS employees were cited for claiming the credit inappropriately or illegally eliciting a significant amount of schadenfreude.
We want to believe that our fellow Americans are honest and would never take advantage of a government program. Yet there is plenty of evidence that it regularly occurs. The Earned Income Tax Credit (EITC) has been around for years and has even been expanded four times, most recently in 2001. Because this credit is refundable, an industry has been created to defraud the government and checks are regularly mailed to non-qualified taxpayers.
All these new credits add to the plethora of existing ones that complicate our tax code, confusing taxpayers and their tax accountants alike. There are at least 25 other credits listed on the main form, each of which has its own special form. What a bonanza for CPA’s and other tax preparers. Furthermore, each credit comes with its own lobbyists and special interest groups who work to educate taxpayers on how to take advantage of these hand-outs.