FTHB Credit

[Black Bart]

To do or not to do (the tax return), that is the question.

I haven't done any First-Time Homebuyer Credit returns yet and have generally been avoiding/running them off (don't want to risk the penalty liability on $8K mistakes).

Got one in recently -- single, no prior house, $8K qualifier -- everything good to go except: he bought it from a relative. Thought it was out at first, but then read that disqualifiers are spouse, parents, grandparents, children, grandchildren only. This relative is an aunt, so no problem (that's right isn't it?).

But, John H. recently mentioned that an ATX board poster said IRS wrote his client asking for closing statement and notarized documents. Which is okay except both his and auntie's identical last names are on them. I'll get $100 for this wages-only 1040X, but I see maybe a long-running back-and-forth with IRS -- they ask for docs, I send, they catch same-names, demand proof they're NOT "related" (beats me how I'd do that), and on and on and...

High fee/low fee, many clients feel they've bought a lawyer and expect you to get that refund you claimed at no extra charge no matter how much time and trouble it takes. His family are good clients, but with the possible complications (I've never been particularly lucky), I'm inclined to send him away.

Thoughts?

[David1980]

Why not explain your concerns over the risk and work required and explain that if it happens, you will be charging whatever hourly fee for any audit work. If the taxpayer knows up front that an audit is not unlikely and that you charge for the work it won't come as a surprise later on.

[Black Bart]

Thanks, Dave

Why not explain your concerns over the risk and work required and explain that if it happens, you will be charging whatever hourly fee for any audit work. If the taxpayer knows up front that an audit is not unlikely and that you charge for the work it won't come as a surprise later on.

I guess that's about all I can do, but sometimes you practically have to "adopt" them on such matters and spending the summer wallowing with it is definitely unappealing.

Sighhh.....the things I do for money.

By the way, do you agree about the aunt being "unrelated" for purposes of this credit?

Has anybody else here received an IRS letter requesting closing statement, documents, etc. (like the ATX guy)?

[OtisMozzetti]

Form 5405

...
Thought it was out at first, but then read that disqualifiers are spouse, parents, grandparents, children, grandchildren only. This relative is an aunt, so no problem (that's right isn't it?).
...

Form 5405 has the instructions included, and that provides an explicit definition of "related" person. It says that consists of "your spouse, ancestors(parents, grandparents, etc.) or lineal descendants". Also, certain corporations and partnerships are related.

Even your brother, who may have the same last name, would not be considered a related party according to what it says on that Form.

Unless one thinks that an aunt is an ancestor, then an aunt would not be considered a related party for these purposes.

[JohnH]

I re-checked the thread over on the unofficial ATX forum to see if anyone else had received an inquiry. Lots of discussion about the how's & why's, but nobody else has reported another IRS question so far. Here's a link if you want to look at the discussion:

http://www.atxcommunity.com/index.php?showtopic=5340&hl=home+buyer+credit

An interesting side note - the taxpayer claiming the credit had deducted property tax on a prior years' return, so this is what probably prompted the inquiry to begin with.

I only had two clients who quallified for the credit this year. The first one was a long-time client, but I sent her to HRB. I explained that she was fully entitled to the credit and that she should get it, but that I didn't want the potential long-term exposure. I did ask her to call me back with the deatils of how things went at HRB. She called me back to tell me they charged her $170 (probably less than I would have charged), and that she wants to know if I'll prepare her return next year. Couldn't have been a better outcome as far as I'm concerned, although I was (and still am) prepared to lose the account to HRB in the future. Bart, whether or not you want to take that route is situation-specific, but you might want to take that experience into account.

Now for confession time. After all my ranting & raving about how I'm not going to touch one of these FTHB credits, I will be preparing one after all. He's serving in the Army (special forces), and I'll make any exception to any of my policies if I can help one of our military heroes. But I expect this to be the only one I prepare.

[JohnH]

I can't speak for Arkansas, but in certain parts of NC you might need to ask a few more questions before you jump to any fast conclusions about how closely someone's related, especially when it comes to Aunts, Uncles, & Cousins.

[Jesse]

Hmmmmmmmmm.......Who's your Daddy?

I can't speak for Arkansas, but in certain parts of NC you might need to ask a few more questions before you jump to any fast conclusions about how closely someone's related, especially when it comes to Aunts, Uncles, & Cousins.

Do you think the next step is to require DNA testing if same last name? And will the preparer bear the responsibility for this DNA proof or else be subject to preparer penalties.

[Black Bart]

Well, yeah

...Even your brother, who may have the same last name, would not be considered a related party according to what it says on that Form...

except the 5405 instructions are a little confusing. Page one says what you say, but on page two you are referred to Pub. 544 (chapter two, page 24) which lists half-brothers, half-sisters, and members of a family along with numerous corp/ptrship set-ups. But then, back to 5405 page two, and (if I'm understanding it right) it's saying disregard all that except the folks (spouse/kids/parents/grandparents) listed on page one, line 8A of 5405.

I don't know why the instructions muddied the water with 544 unless to define all the various "related" corporation and partnership entities (also maybe didn't want to list all that stuff on 5405 and confuse ordinary DIYers).

[Jesse]

I see what you mean -

It is confusing at first and I think your suggested reasons for muddied water seem correct.

For more information about related persons, see Nondeductible Loss in Chapter 2 of Pub. 544, Sales and Other Dispositions of Assets. When determining whether you acquired your main home from a related person, family members in that discussion (except item 7) include only the people mentioned in 8a above.

Item 7: A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family.

Form 5405:
8a. Your spouse, ancestors (parents, grandparents, etc.), or lineal descendants (children, grandchildren, etc.).

More to muddy waters from IRS Questions and Answers:
Q. Is a step-relative considered a related party?

A. Step-relatives are neither ancestors nor lineal descendents and are therefore not related persons for purposes of the first-time homebuyer credit. (05/06/09).

[Edsel]

FTHC penalty

Tell me more about the FTHB Penalty of which you speak. I guess I don't read the newspaper closely enough, but it would this would be no more a penalty than anything else. And if there are common sense solutions to avoiding it, why not prepare the return?

[Black Bart]

I'm

Tell me more about the FTHB Penalty of which you speak. I guess I don't read the newspaper closely enough, but it would this would be no more a penalty than anything else. And if there are common sense solutions to avoiding it, why not prepare the return?

not talking about a specific FTHB penalty and, as far as I know, one doesn't exist. What I am talking about is this; while I can't speak for your neighborhood, $8K is serious money around here. If I write it up, he gets/spends the money, IRS later says he's not eligible (maybe aunts ARE "related"/maybe something else/maybe whatever) and he has to cough up $8K plus interest plus SOME kind of overstatement/understatement penalty, then he'll be saying "You told me I was eligible and I took it on your advice (also, the usual hypocrite will throw in "I absolutely want to pay the right amount of tax." -- Yeah, sure!).

It seems pretty simple and straightforward, but that's what I thought about the $7,500 credit and I'll bet beaucoup preparers have heard a hot earful from December housebuyers now holding a 15 year loan instead of an $8,000 grant (I can just hear it -- "You should have anticipated this and advised me to wait 'til next year.").

Anyway, dealing with that amount of money (worth hiring a lawyer for) and the possible pitfalls involved (check recent FTHB threads for details) strikes me as dangerous. But, everybody to his/her own opinion and if you see no problems/worries, then by all means press on.

[Black Bart]

Form 5405 has the instructions included, and that provides an explicit definition of "related" person. It says that consists of "your spouse, ancestors(parents, grandparents, etc.) or lineal descendants". Also, certain corporations and partnerships are related.

Even your brother, who may have the same last name, would not be considered a related party according to what it says on that Form.

Unless one thinks that an aunt is an ancestor, then an aunt would not be considered a related party for these purposes.

Found this (not IRS, but legal-dictionary.com): Lineal descendant: A person who is in direct line to an ancestor, such as child, grandchild, great-grandchild and on forever. A lineal descendant is distinguished from a "collateral" descendant which would be from the line of a brother, sister, aunt or uncle.

[Zee]

Why not simply state in your tax engagement letter that you will not be responsible for an interest, penalties, or repayment of taxes should the IRS disallow the FTHB credit? If you don't routinely use engagement letters, make an exception for FTHB returns and use them.

[Black Bart]

Like John,

Why not simply state in your tax engagement letter that you will not be responsible for an interest, penalties, or repayment of taxes should the IRS disallow the FTHB credit? If you don't routinely use engagement letters, make an exception for FTHB returns and use them.

The issue really isn't the penalty, but the $8K. Most will spend it and not be able to come up with it again -- very likely their lawyer would feel like you (the preparer) should instead. But anyway, I decided to go ahead with it and have already included a disclaimer of liability like you mention in my engagement letter. Thanks.

P.S. Anything new on the IRS job?

[MLINDER42]

Fthb

Using the same philosophy every one of my clients that receives EITC and later has an audit and must pay it back could hold me responsible.I could never do one of these returns which is most of my clients.