Fraudulent or Erroneous Claims for First Time Homebuyer Credit   The Treasury Inspector General for Tax Administration (TIGTA) stated in an audit report released June 23 that the IRS continues to lack sufficient controls to stop erroneous or fraudulent claims for the First-Time Homebuyer Tax Credit (FHTC).  According to TIGTA, 1.8 million taxpayers received $12.6 billion in tax credits under the FHTC program through the end of February, 2010 of which an estimated 14,132 individuals received erroneous credits totaling at least $26.7 million.  Examples of fraudulent or erroneous claims included: Children and persons who did not purchase a home fraudulently claimed the first time homebuyer credit. 2,555 erroneous claims were made for $17.6 million in credits by taxpayers who purchased their homes before the effective date of the credit. 1,295 prisoners claimed $9.1 million in erroneous claims for homes purchased while they were incarcerated. A large number of duplicate claims were filed for the same home.  In one case, 67 taxpayers used the same home purchase to claim the credit. 87 IRS employees claimed the credit despite owning their home more than three years before claiming the credit. IRS failed to catch these fraudulent or erroneous claims and although steps have been taken steps to strengthen controls and help prevent the issuance of inappropriate credits, TIGTA reports that additional controls are needed.  On July 2, the President signed the Homebuyer Assistance and Improvement Act of 2010 extending the closing date deadline for the $8,000 first-time homebuyer tax credit from June 30 to September 30, 2010. All this considered, it’s not surprising that many taxpayers are experiencing delays in the processing of their claim for the credit and attendant refund.     Significant Changes--2009   Deduction for Sales Tax on New Vehicles Taxpayers who purchased a new car, light truck, motorcycle or motor home after February 16, 2009 and before January 1, 2010 can deduct the state and local tax paid. The amount is limited to the tax paid on the first $49,500 of the purchase price. The deduction can be used to increase the standard deduction or as an itemized deduction and is subject to phase out rules     Economic Recovery Payment Most recipients of social security benefits, supplemental security income, railroad retirement or veteran’s benefits should have received a stimulus payment of $250 in 2009. This economic recovery payment is not taxable. For married couples, if both spouses receive benefits, each is entitled to the stimulus payment.     Making Work Pay Credit The Making Work Pay Credit is 6.2% of earned income not to exceed $400 ($800 if married filing jointly). It is subject to income limitations and will be reduced if the taxpayer received an economic recovery payment or is entitled to the government retiree credit.     Unemployment Compensation Beginning in 2009, each recipient of unemployment compensation can exclude from gross income up to $2,400 of unemployment benefits received.     Government Retiree Credit This credit is available to recipients of pension or annuity payments for service performed for the U.S. government or any U.S., state or local government or any instrumentality of any of these, as long as the service was not covered by social security. The credit is $250 ($500 if married and filing jointly and both spouses receive a qualifying pension or annuity). The credit is not allowable if the taxpayer received an economic recovery payment.     American Opportunity Tax Credit This new credit is a modification of the Hope Credit. The maximum credit is $2,500 per student and is subject to phase out rules. For students who attended a school in a Midwestern disaster area, the credit can be calculated using previous rules. The credit can be claimed for the first four years of post-secondary education (previously two years). Generally, 40% of the credit is refundable. Qualified tuition and related expenses have been expanded to include books, supplies and equipment needed for a course.     Sale of Main Home Gain from the sale of the main residence is no longer excludable from income if allocable to periods of non-qualified use. Generally, non-qualified use means any period after 2008 in which neither spouse nor former spouse used the property as a main home (with certain exceptions).     Nonbusiness Energy Property Credit This credit which expired after 2007 has been reinstated and is limited to $1,500 for improvements made in 2009 and 2010. The credit is 30% of the cost of certain energy-efficient property or improvements such as high-efficiency heat pumps, air conditioners, water heaters, energy-efficient windows, doors, insulation, certain roofs and stoves that burn biomass fuel.   Residential Energy Property Credit Beginning in 2009, there is no limitation on the 30% credit amount for qualified solar electric property costs, qualified solar water heating property costs, qualified small energy property costs and qualified geothermal heat pump property      Record Retention Guidelines  Several clients mentioned that, due to identity theft concerns, they have made it a practice to shred most documents including all of their paid bills. While identity theft is a serious problem, destruction of some of these records creates another problem, the inability to provide documentation to support tax deductions. In the event of an audit, unsupported deductions can be disallowed, resulting in assessment of additional tax, penalties and interest. Considering IRS’s announcement of increased audits, now more than ever it is important that the requirement to maintain supporting documentation be met.  Whether you shred routinely or just got the urge to clean a drawer, it is important to know what to keep.  If you have any questions, please call or e-mail us at info@maixnercpas.com.  We will be happy to forward a brochure that outlines which records to keep and how long they must be kept