The IRS examined 500,000 returns containing the first time home buyer credit and disallowed nearly 1.6 million in such credits. That works out to only 200 adjustments out of 500,000 returns examined, or .04% success. By my math, taxpayers probably paid a lot more in examiner wages, benefits, and pension funding than what was collected.
It turns out the IRS used outdated methodology for selecting returns to examine. They selected based on criteria indicating a likelihood of math errors instead of the (now preferred) method which selects returns with highest risk indicators for claiming credits which should be disallowed. Chances are quite a few people received credits for which they were not eligible, despite the 500,000 examinations.
I'd like to add that the notices requesting additional information to support the credit were infuriatingly vague. They simply stated 'supply information to support the credit.' We had already attached to the tax return the records called for in the instructions so this left us scratching our heads. Did these documents not reach the correct person? Did they want some other document? Finding the answer ate up our time and the IRS agent's time as we had to seek clarification by phone in each and every case. Totally avoidable!
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