The IRS, and Our Latest Housing Scam

Back in the winter when Congress was debating whether stimulus programs could get money into the economy quickly enough to make a difference, supporters of government efforts to prime the pump argued that tax credits would offer Americans a quick financial shot in the arm. After all, what else does government need to do to process a tax credit except take in applications, verify their accuracy, and then ship the money out the door?

Oops.

In what amounts to the most underreported story of the year, the Treasury Department's Inspector General testified last week that in an effort to get money into the economy quickly the Internal Revenue Service rubber-stamped most applications for the $8,000 tax credit for first time homebuyers, and in the process the government has paid out hundreds of millions of dollars to people who probably scammed the feds out of our money.

About 107,000 taxpayers out of 1.4 million who claimed the credit so far may have abused the program, the IG estimated, including about 74,000 whose previous tax returns indicate they were not actually first time buyers (No doubt many of these will claim the Rep. Charlie Rangel rule of home ownership, which is simultaneously to declare several homes as a primary residence in order to secure a tax break on one or more). Another 19,300 applicants apparently received the tax credit even though they didn't buy a home (okay, that's my emphasis, not the Inspector General's). And then, in the final absurdity, 580 of the applications approved by the IRS listed homeowners who were under 18 years of age, including some four-year-olds. No doubt the $4 million that the feds paid to these kids will go into their college savings accounts.

The IG testified that prior to the start of the program his office advised the IRS on several procedures to identify potentially fraudulent claims before sending out checks, but the agency ignored the recommendations because officials were apparently concerned about getting the money into the economy as quickly as possible. Whether IRS officials were pressed by someone in the White House or Congress to get the checks out quickly is an issue worth investigating, if the media were interested.

But apparently they are not. The IG's revelations provoked a collective yawn in the press. According to the Nexis newspaper database, the testimony garnered barely more than a dozen mentions in stories, including a few buried deep in pieces about efforts to extend the tax credit. Newspaper opinion editors yawned too. I could find just a few editorials, including one mild tsk-tsk in the Boston Globe. The major TV networks and cable news programs mentioned the fraud just a handful of times.

What's most remarkable is that at about the same time the IG was dropping this bomb on Congress last Thursday the issue of fat bonuses on Wall Street also surfaced in the press. Since then newspapers have published about 430 stories about financial firms' compensation, while the electronic media ran some 130 pieces on bonuses, including multiple mentions on CNN, MSNBC and that rogue outfit, Fox News.

Talk about a double standard. I'm sympathetic to anger on Main Street against banks and investment banks that accepted government money to stay afloat and now are paying big bonuses out of profits. But what the big banks are doing is still legal, if controversial. Compare that to potentially $500 million in homebuyers' tax credit fraud, according to estimates by the IG. Somehow it seems disproportionate to evoke more outrage about how banks will disperse their earnings than how the IRS may have squandered our money.

The IG's report raises all sorts of provocative issues. During the many stimulus debates that took place last winter, advocates simultaneously assured us that programs would get underway quickly and that fraud and abuse would be held at bay. But many of the stimulus programs are far more complex than the homebuyers' tax credit, including construction projects that will hand out huge chunks of money to private firms under fast-tracked bidding procedures. Big dollars are also going through programs that are habitually subject to widespread fraud, like Medicaid. If it was boorish of critics to complain about potential fraud when the stimulus hadn't yet even been approved, it certainly isn't now that the Treasury's IG has uncovered the first widespread abuses.

The IG's testimony came at hearings to extend the tax credit beyond its Nov. 30 expiration. The real estate industry and its supporters in Congress are worried about what will happen to the home market without this big government subsidy. The industry generously estimates that of the estimated 1.8 million buyers who will take advantage of the tax credit by the end of November, about 350,000 would not have purchased a home if the credit didn't exist. But some nonpartisan experts believe that many of those buyers would have bought a home eventually anyway and the credit merely pulled their buying forward by six months to a year, just as cash for clunkers pulled forward some car buying but resulted in a sales slump when the program expired. The IG's testimony raises the additional question of how many of those incremental 350,000 buyers were legitimate first-time purchasers.

The underwhelming reaction to the tax credit rip-off helps explain how the federal government can just keep merrily subsidizing home buying in America despite one calamity after another. Two weeks before the IG's testimony, officials at the Federal Housing Administration were forced in Congressional hearings to acknowledge problems with their portfolio of insured mortgages, which grew rapidly when Congress pressed the agency to step in to the home market after Fannie Mae and Freddie Mac crashed. Still, you are more likely to find over the last three weeks stories in the press about how to obtain an FHA-insured mortgage than read reports on how the agency may need a bailout because of unwise mortgage subsidies and risky underwriting strategies.

If it seems like hardly anyone in Washington is learning anything from our current economic turmoil, it's because there apparently isn't any penalty in national politics for being foolish and imprudent with our money. It's only when people on Wall Street are foolish and imprudent with their money that everybody seems to get really upset.