A four-year-old buys a house, and other first-time home-buyer tax credit tricks

From a Treasury Inspector General's report to Congress:

Through July 25, 2009, we identified more than 580 taxpayers younger than 18 years of age who claimed almost $4 million in First-Time Homebuyer Credits.  The youngest taxpayers receiving the Credit were four years old.  Contract law generally exempts children under the age of 18 from being bound by the terms of a contract.  Therefore, it is unlikely that these taxpayers would have entered into an arm's-length transaction for the purchase of a home.

Yeah, your kid may be special, but he's not that special. The Treasury tax-oversight office is onto you. It knows you make too much money to claim the tax credit and therefore put little Johnny's name on the form instead. Bad citizen!

The report also pointed out that more than 19,300 first-time home buyers hadn't, um, bought a home. Now, these taxpayers (all e-filers; we don't have figures for paper returns yet) allegedly intended to buy a home. The problem: the law says you have to buy the house before you can claim the tax credit.

Another tip-off to potentially fraudulent behavior: claiming a first-time home-buyer tax credit when you've already been claiming deductions for things like home mortgage interest and real estate taxes. Nearly 74,000 people fall into that camp, though there could be some legitimate situations mixed in (e.g., you own property but it's not your principal residence).

The IRS is going back through more than 100,000 filings and taking a second look to see who might have to give back the credit—and even pay a penalty. Let's see a four-year-old talk his way out of that.

Barbara!