Ken Harney
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WASHINGTON -- Can the Internal Revenue Service handle tax credit programs that pump out billions of dollars to homeowners and buyers? A new federal investigation on home energy tax credits suggests the answer may be: not quite yet.

The Treasury Department's inspector general for tax administration audited the residential tax credit program created by Congress to encourage homeowners to install energy-saving equipment and materials in their houses, and found some disturbing oversights.

One part of the program offers 30 percent credits -- with no dollar limit -- for solar energy systems, geothermal heat pumps, wind turbines and fuel cells installed before Dec. 31, 2016. A second part of the program -- for energy-efficiency home improvements -- offered credits up to $1,500 for qualifying exterior windows and doors, insulation and roofing materials.

Both credits have been popular. More than 6.8 million taxpayers received credits during tax year 2009, totaling $5.8 billion through December 2010. But substantial numbers of the filings had problems that went undetected by the IRS, according to the inspector general's investigation. In a review of 5 million returns, auditors found that more than 302,000 taxpayers, who received a total of $234 million in credits from the IRS, showed no evidence of actually owning a home -- the minimum requirement for eligibility.

A review of a smaller sample of returns, supplemented with local real estate property deed information, found that 30 percent "had no record of owning a home."

Investigators also discovered that the IRS was unable to verify other key requirements for eligibility when taxpayers filed returns. For example, the agency could not verify that a claimant actually "purchased a qualified energy-saving product and made energy-efficiency improvements." Nor could it verify the cost of the energy-saving equipment or whether the improvements were made during the required time limits.

Since IRS Form 5695, which is used by homeowners to claim energy credits, does not require documentation of purchases, property addresses or whether the property even qualifies as the taxpayer's residence, the government primarily relies on the veracity of the taxpayer in processing the credits, and sometimes only discovers irregularities or fraud when it later audits an individual's return. In a response to the inspector general following the audit, the IRS said it will revise Form 5695 to require documentation before processing credit requests.

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Ken Harney

Ken Harney award-winning real estate column, "The Nation's Housing."

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