First Time Homebuyer Credit

[Jesse]

I don't quite understand why one would refuse to do a return with the "credit". I don't agree with a lot of the tax code such as EIC, child credit, additional child credit etc but I prepare the returns because that is my profession. If they offered a 15 year no interest loan to me I would jump on it. I actually filed a return with the credit yesterday. He is going to use the money to update heating etc in the home. Others may use to pay off debt and I am sure others will use it for vacations etc. Not really any of my business. I explain what the credit really is to the client and have them sign a form that they understand the repayment side of the loan. My job is done.

Did you tell him if he needs a furnace to make sure it is a qualifying high efficiency furnace and he could be eligible for the the energy credit in 2009?

[Bucky]

I mentioned the credit but in the past the cost to purchase furnace that qualifies for the credit vs a 90% ef furnace outways the credit by a pretty good amount. Maybe the gap has narrowed since 2007.

[David1980]

With so little documentation on the 5405, is there not a great potential for fraud on this credit?

Yes.

I've already had one person want to do the credit based on "tentative purchase" in June. My guess is they found someone else willing to do it for them and the home will never be purchased. I hope they don't get away with it, but fear they might. And then if Obama does make it permanent, that's like $7500 free money. Oh well, I try to stay optimistic that the IRS will be verifying these things...

[JohnH]

What are your reasons for not doing? Is it because of the obligation you'd feel to track over 15 year?

My reasons are probably an overabundance of caution on my part (a familiar phrase we've heard recently in another context). I'm not philosophically opposed to the credit and I would certainly encourage anyone who is eligible to get it.

I can envision a number of scenarios in which I prepare a return claiming the credit and then in the next few years the client goes to another preparer or several other preparers. He subsequently sells the home or converts it to a rental and "forgets" to mention the credit or for some other reason fails to repay the balance. When IRS gets on his case, he runs for the exits and claims "the guy who prepared the original return didn't tell me about this repayment business." My only defense will be to be sure that I keep all the disclosure paperwork in my files because I'm sure he will have conveniently lost his copy. I just don't want to keep up with the decade and a half of CYA. (Especially since I'm 61 this year)

The nearest thing I can compare this to would be the Mortgage Credit Certificates. I've had a half-dozen clients over the years who claimed these things and at least 3 of them tried to game the system when they decided to sell or convert the property to rental. Every one of them went somewhere else when I advised them of their responsibility and I'll bet not one of them mentioned the MCC to their new preparer. In these cases, they signed paperwork up front at the time the loan was made, so the government was involved in the compliance aspect from the outset. In the case of this Home Buyer credit, only the taxpayer and the preparer are involved, so there's more implied responsibility on the preparer and I just don't relish taking on any more enforcement duties for the IRS.

Maybe the balance on these credits will be forgiven a few years out and all my concerns will be irrelevant. But if not, I predict that some preparers will have a particular client situation blow up in 5-10 years and they will come to regret the day they prepared a return claiming this credit. I'll also predict that proving that the client was properly informed will involve more than just flashing a disclosure statement, assuming it's still in your files. (Better keep the original, and if the client leaves, be sure to mark that file in such a way that it isn't purged for 15 years) To me, the risk just isn't worth it, so I'll pass thank you.

[Black Bart]

Once burned, twice shy.

I don't quite understand why one would refuse to do a return with the "credit". I don't agree with a lot of the tax code such as EIC, child credit, additional child credit etc but I prepare the returns because that is my profession. If they offered a 15 year no interest loan to me I would jump on it. I actually filed a return with the credit yesterday. He is going to use the money to update heating etc in the home. Others may use to pay off debt and I am sure others will use it for vacations etc. Not really any of my business. I explain what the credit really is to the client and have them sign a form that they understand the repayment side of the loan. My job is done.

It boils down to each individual's tolerance for risk and/or hassle. As you say some don't like the EIC, but it's part of the tax calc and affects so many people it can't be ignored. Enough 5405 requests may eventually force participation by those who'd rather not in order to remain competetive (I began EF and RALs that way).

EIC refunds themselves are risky simply because no way can broke folks pay back an undue $4,824 (maximum). I'm working one such case right now which IRS is contesting (two years -- approx. $5,000 due). If ultimately rejected I expect to hear "You told me it was okay" (and never mind his submitted "facts"). But a disqualified homebuyer credit -- $7,500 plus a couple years penalty and interest (say about $10,000) is another order of magnitude. Such a bill presented to people living from paycheck to paycheck would be a truly staggering blow and -- I believe -- would surely prompt this question -- "Is it my fault or someone else's"?

The search for a scapegoat would be as easy as ABC (Anybody But Client).

[JG EA]

OK Got it.

My thing is to make sure I've checked the box and actually told everyone about it.

Now I'll worry if someone wants it.

Actually what you point out is real. I've had clients be mad they ever took IRA's out to save on their taxes. Not a good deal when they actually start taking them and paying taxes on them they say.

[WhiteOleander]

OK Got it.

My thing is to make sure I've checked the box and actually told everyone about it.

Now I'll worry if someone wants it.

Actually what you point out is real. I've had clients be mad they ever took IRA's out to save on their taxes. Not a good deal when they actually start taking them and paying taxes on them they say.

Just tell them to give you the money and you'll pay the tax

[Black Bart]

I'm just sayin'

OK Got it. My thing is to make sure I've checked the box and actually told everyone about it. Now I'll worry if someone wants it. Actually what you point out is real. I've had clients be mad they ever took IRA's out to save on their taxes. Not a good deal when they actually start taking them and paying taxes on them they say.

to watch out. I don't know what 1st-HB problems lie ahead and if Bucky's comfortable with them, then that's fine. I'm leery because I've been burned a few times. I find that over time, some people change their minds, forget/alter the facts, and harbor ill-will toward anyone even marginally involved in the loss of their money (no matter what papers you get them to sign).

Here's an example: Decades ago interest rates were 14% and SBA offered farmers hereabouts 5% loans for "agri-related" purposes. Nobody was minding the store and it was used for everything but (vacation, new car, whatever). The latest trendy thing; people rushed to get on the bandwagon. Three clients asked my opinion and I, like Bucky, couldn't see any downside, so I prepped $5K (substantial for that day) loan docs. They got "cheap government money" and a five year payback. Everything was hunky-dory.

But after a couple of years...a strange thing began to happen. The "fun" money was long-gone, but the payments remained and I noticed our annual "tax chats" now included remorseful remarks about "That SBA thing." Subtle at first, "It's kind of a pain," later escalating to "If I had known better I wouldn't have done it," and, in the end, "I don't know why I let you sign me up for that thing in the first place!" While long before lawsuits were common, two eventually went elsewhere. I know it sounds cynical and bitter, but so often it seems people just can't blame themselves for their missteps...and that leaves...well, you-know-who.

[JohnH]

---> I know it sounds cynical and bitter, but so often it seems people just can't blame themselves for their missteps...and that leaves...well, you-know-who. <----

Bart: I've found that no matter how cynical I become, I just can't seem to keep up with reality.

[JG EA]

But after a couple of years...a strange thing began to happen. The "fun" money was long-gone, but the payments remained and I noticed our annual "tax chats" now included remorseful remarks about "That SBA thing." Subtle at first, "It's kind of a pain," later escalating to "If I had known better I wouldn't have done it," and, in the end, "I don't know why I let you sign me up for that thing in the first place!" While long before lawsuits were common, two eventually went elsewhere. I know it sounds cynical and bitter, but so often it seems people just can't blame themselves for their missteps...and that leaves...well, you-know-who.

Good advice from WhiteOleander

Just tell them to give you the money and you'll pay the tax

Or in your case the interest.
I now have a bunch of different sayings by the phone and in a file. So, when anyone says anything annoying any more I'll going to say, "Just a minute, I have a response for that."

[BP.]

I now have a bunch of different sayings by the phone and in a file. So, when anyone says anything annoying any more I'll going to say, "Just a minute, I have a response for that."

Cool! Will you share some with us? I'd like to be able to whip out some pat phrases so I can preserve the resources in ye olde "bio-computer."

[JohnH]

Great idea.
See new topic.
Anyone feel free to contribute.

[rgtaxservice]

CYA Disclosure

I drafted a condensed version of the IRS First Time Homebuyers Credit FAQ into a disclosure form. It allows the client to have a written explanation of what the 'credit' is and details the repayment issue. Eligible clients sign in either case...to take the credit or decline it. This will avoid the "I didn't know" or "You never told me" crap down the road.

[JohnH]

Good job. Now all you have to do is keep up with the signed originals for 15 years (actually 17 years since repayment doesn't start until the 2nd year.)

BTW, the client I sent to HRB told me they only charged her $170 for the entire return prep, including the Home Buyer Credit calculation. Single taxpayer with one W-2 and no other income or AGI adjustment items. I'm guessing here, but it's likely she didn't itemize since the purchase was late in 2008 so they probably made a notation to elect to amortize the points/origination fee, etc. Nevertheless, I would have expected the charge at HRB to be higher for this return.

[BP.]

I drafted a condensed version of the IRS First Time Homebuyers Credit FAQ into a disclosure form. It allows the client to have a written explanation of what the 'credit' is and details the repayment issue. Eligible clients sign in either case...to take the credit or decline it. This will avoid the "I didn't know" or "You never told me" crap down the road.

Excellent. Thanks for this tip.