First-Time Homebuyer Tax Credit:
Taxpayers' Use of the Credit and Implementation and Compliance Challenges
GAO-10-166T, Oct 22, 2009
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This testimony discusses taxpayers' use of the First-time Homebuyer Credit (FTHBC) and the Internal Revenue Service's (IRS) implementation and compliance challenges. As an important part of the recent economic stimulus efforts, Congress enacted the FTHBC to assist the struggling real estate market and encourage taxpayers to purchase their first home. The credit initially was enacted by the Housing and Economic Recovery Act of 2008 (Housing Act) and revised by the American Recovery and Reinvestment Act of 2009 (Recovery Act). The 2008 FTHBC provided taxpayers a credit of up to $7,500 that must be paid back over 15 years. The Recovery Act increased the maximum credit for the 2009 FTHBC to $8,000, with no payback required unless the home ceases to be the taxpayer's principal residence within 3 years. This $8,000 credit is a refundable tax credit that is paid out even if there is no tax liability or the credit exceeds the amount of any tax due. The 2009 FTHBC was enacted into law on February 17, 2009, but eligibility was made retroactive for homes purchased beginning January 1, 2009. This testimony today, based on on-going work, describes two issues: (1) the extent to which taxpayers are using the FTHBC, including breakouts by state and income; and (2) IRS's implementation and compliance challenges associated with both the 2008 and 2009 credits.
According to preliminary data from IRS, as of August 22, 2009, over 1.4 million taxpayers have claimed the FTHBC for homes purchased in 2008 and 2009. This represents total foregone tax revenue of about $10 billion through August 22. Based on claims made to IRS as of August 22, 2009, 59 percent of taxpayers who claimed the FTHBC had an adjusted gross income (AGI) of less than $50,000. The FTHBC was disproportionately claimed by taxpayers in the $25,000 to $100,000 AGI range. About 74 percent of credit claimants were in this AGI range, as compared to 46 percent of all taxpayers who filed a tax return in 2007. The low percentage of taxpayers claiming the credit with over $100,000 AGI reflects, in part, the income cap, for the FTHBC. For example, for joint filers the credit phases out between $150,000 and $170,000. IRS had to balance quick implementation of the FTHBC with enforcement of the laws' requirements. Although IRS routinely implements tax legislation, the 2008 and 2009 FTHBC pose significant implementation challenges because they occurred during the filing season and in conjunction with other multifaceted tax law changes. IRS quickly implemented the complex FTHBC legislation, allowing taxpayers to claim about $10 billion as of August 2009. For example, IRS (1) issued a new form, the Form 5405--"First-Time Homebuyer Credit"--and new instructions for the Form 5405, and revised other related forms and instructions; (2) communicated with taxpayers and tax return preparers through a variety of avenues, such as news releases, postings on irs.gov, podcasts, and YouTube videos; and (3) made computer programming changes to enable processing for paper and electronically filed returns. IRS faces significant challenges in determining if taxpayers are complying with the numerous conditions for the credit. For example, to determine eligibility, IRS must verify that taxpayers have not owned a house in the previous 3 years and verify the closing date on home purchases. Other challenges include enforcing the $500 per year payback provision in the 2008 credit. According to recent IRS data, up to $7 billion could be repaid to the federal treasury over the 15-year period of this provision.