The Tax Attic with Jerry Coon, September 30, 2010

Prisoners claim fraudulent tax credit 

Principal Residence Exemption explained 


Jerry Coon, Enrolled Agent

When you go to tax seminars, you find out all kinds of information about our tax system. For example, last Friday at a seminar in Lansing, I learned some more facts about people claiming the First Time Homebuyer Credit who were not supposed to be claiming the credit. It has been a fiasco.

For example, so far the Internal Revenue Service has found that 1,295 prisoners have claimed the credit. These prisoners are the ultimate first-time homebuyers, especially if they were in prison for more than the last three years. However, one of the stipulations of getting the credit is that you have to own and occupy the residence. It’s tough to occupy a residence when you are sitting in an eight-by-eight prison cell. Incredibly enough, 241 of those prisoners are in prison for the long term because they have lifetime sentences.

Total fraudulent claim dollars paid out to these 1,295 prisoners was $9,100,000. A total of 10,282 claims were made on homes that were also claimed on another credit. In fact, in the worse case, there were 67 claims made on one home. Let’s do the math on that one: 10,282 times $8,000 equals $82,256,000. Total fraudulent claim dollars paid out in these 10,282 cases was $82,256,000.

Finally, the IRS found that 2,555 claims were made on houses that were purchased before April 9, 2008. Only houses purchased on or after that date qualify. The total fraudulent claims made equal $17,600,000.

As of now, total fraudulent claims made and paid out equal approximately $108,956,000. That’s a shocking figure. I am just stunned that these amounts were given out without better due diligence being done before the checks were issued.

On a different topic, we also had a discussion of the Principal Residence Exemption (PRE). This term came into being when we passed Proposal A way back in 1994. This allows taxpayers who own and occupy their residence to be exempt from 18 mills of the local school-operating property taxes.

Taxpayers file a PRE affidavit with their township or city by May 1 of the year of the claim. The local assessor then makes the adjustment on the next property tax bill sent to the taxpayers. If the affidavit is filed after May 1, it will apply to the next calendar year’s taxes. Taxpayers can only have one PRE because they can only have one principal residence. In today’s economic environment, however, that has become

an issue.

There are many taxpayers who have purchased a new home but have not been able to sell the prior residence. They own two homes but, technically, because taxpayers can only have one PRE, it moved from the prior residence to the new one when the taxpayers moved into the new residence. The taxpayers then experienced an 18-mill increase in the property tax of the prior residence. Not only do they have to pay two mortgages, but the taxes on that second mortgage just increased dramatically.

This was perceived as being quite unfair so the Michigan legislature created a way for taxpayers to retain PRE status on the original residence. By filing a Form 4640, Conditional Rescission of PRE, with the local assessor, taxpayers are allowed to retain PRE status on a previous residence for up to three years after they moved into a new residence. Sometimes our Michigan legislature actually does a good thing and this is one of them.

There are conditions that must be met in order to qualify for Form 4640 usage:

1. The property must be unoccupied. The taxpayer can’t have a child, a nephew, an uncle, a neighbor, or a caretaker live there. Unoccupied means empty.

2. The property must be for sale.

3. The property cannot be leased.

4. Finally, the property cannot be used for business or commercial purposes. I gather that means it can’t be used as a storage location for business or commercial property.

If all of these conditions are met, Form 4640 can be filed annually for up to three years. The tax savings can be quite handsome for those taxpayers who are caught owning two residences. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service in Rockford. Contact Jerry at

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