The new policy clarifies what documentation taxpayers need to submit to obtain either credit. When Congress revised the programs in November, it ordered the IRS to tighten its rules and monitoring to curtail widespread fraud that had emerged last year.
This included fictitious home purchases in which people received $8,000 checks from the government for transactions that had never occurred. In some cases, federal auditors found that fraud ringleaders were submitting multiple claims for credits and splitting the government payouts with people who had no financial ability to buy a house.
To avoid such abuses in the revised credit program -- which is scheduled to be available for qualified purchases closed through June 30 -- Congress directed the IRS to spell out documentation standards in detail and to install monitoring systems to spot fraud upfront. Among the keys to the monitoring system is that all documentation accompanying credit claims must comply with the IRS's detailed rules. Here's what the agency wants from anyone seeking a credit:
-- A fully executed IRS Form 5405 (available at http://irs.gov) on which taxpayers provide basic information supporting their claim of eligibility, including income and home purchase date.
-- A copy of the settlement statement proving that the sale and purchase transactions actually took place. In instructions to taxpayers issued last month, the IRS said the settlement statement should show "all parties' names and signatures, property address, sales price, and date of purchase. Normally this is the properly executed Form HUD-1."
The problem, however, is that home closing and settlement customs vary from state to state, and sometimes the HUD-1 does not contain both the seller's and the buyer's signatures. In escrow states such as California, where settlements are not sit-down affairs bringing together sellers and buyers, both sets of signatures might not appear on the HUD-1 received by the buyer.
In California, buyers sign an estimated closing statement or an estimated HUD-1 "at the time they sign their loan documents," said Donna Grosso, president of the California Escrow Association. Sellers have their "estimated closing submitted to them for their review and signature during or near the same time period as the buyer. We prepare the final closing statement or the final HUD-1 on the closing date," which is the date of recordation.
As a result, Grosso said, "we do not have the buyers or sellers available to sign the final closing statement." This seems to create an obstacle to meeting the IRS's instructions and makes it more likely that applicants' claims will be rejected or delayed for special review.
The agency tried to address that issue Feb. 12 by loosening its requirements. "In areas where signatures are not required on the settlement document, the IRS has clarified that it will accept a settlement statement if it is completed and valid according to local law," the agency said. "The IRS encourages those buyers to sign the settlement statement prior to attaching it to the tax return.
In situations where the signature of the seller is not on the settlement document, the IRS advises the buyer to still sign the document."
Despite the fact that Form 5405 continues to require all parties' signatures on the HUD-1 or settlement document, the agency is now essentially saying: "Don't worry about it. As long as your settlement statement conforms to prevailing local practices, we'll accept it."
This could be important for large numbers of repeat and first-time buyers who are planning to file for the credit with this year's tax returns and want to be sure they get through the IRS's tougher standards. Nationwide, according to estimates by the National Association of Realtors, 1.5 million repeat purchasers and 900,000 first-timers are expected to apply for credits this year.
What else does the IRS want to see on claims from home buyers? For repeat purchasers, the agency wants documentation that, before their latest purchase, they had lived in their former property for a consecutive five years out of the past eight years. This may include property tax records, hazard insurance records or copies of annual mortgage interest statements filed with their federal taxes.
One caveat for filers: Because of the increased documentation and monitoring, IRS processing will take four to eight weeks. So don't expect your $6,500 or $8,000 check overnight.
IRS clarifies the housing tax credit.
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