Are You Kidding Me? The Time the IRS Told Me I Owed $9,000

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I bought my first home in May of 2008, a few months after graduating college but after accepting admission to a second tier graduate school in Waco, TX. We signed the papers such that I became the official owner of my beautiful condominium on June 1st, 2008 (I still cannot believe that I’ve been here for three years!). For a reference point, most graduate student stipends are $15,000-$20,000 a year (rollin' in the dough, clearly). Because the cost of living in Waco is significantly lower than Tacoma, WA, my mother and I worked out a budget where I could pay my mortgage and all my bills on my graduate student stipend.

Isn't it cute?!

When I bought my home, my brother was working as a mortgage broker in WA and knew all the ins and outs of home buying. He suggested I apply for the First-Time Homebuyer’s Credit, which at the time was an interest-free loan for 10% of the cost of your new home (for those who bought homes in 2009, this was actually a gift from the government, but I actually have to pay my amount back yearly on my taxes). I applied and received the money with my tax return.

In September of 2010, I received a letter from the IRS telling me I needed to provide evidence I owned the house, so I sent off a copy of my HUD-1 statement. In March 2011, they responded with a letter telling me I owed $9000: the cost of my 10% loan, interest over the previous two years, and a fee for “defrauding the government.” Apparently I did not qualify for the First-Time Homebuyer’s Credit because my parents, who own their own house in WA, co-signed my loan.

[Insert Sar’s frustration, crying, and plenty of curse words here.]

After a little bit of research from my mom and amazing Aunt Heide (who happened to be visiting when I received this letter), we realized that the IRS did not seem to know their own rules. In fact, straight off the IRS website was a scenario in which a single first-time homebuyer buys a house and her parent cosigns a loan, and the first-time homebuyer can still get the credit (S2). Let’s remember how all of this is a moot point, because I have to pay back the loan anyway!

Luckily, both my mom and Aunt Heide had worked in government jobs for the majority of their lives so they were both used to dealing with government agencies. Aunt Heide drafted a letter in response to the IRS while my mom and I comprised evidentiary support that I was the primary resident of my home. We ended up sending a three-page letter and seven supporting exhibits ranging from my HUD-1 statement; bank and homeowner’s insurance statements; property tax statements; energy bills; bank statements for all of 2008 and February 2011; and my tax returns, all of which my name was the primary resident. I even included IRS Form 5405 from my tax return that initiated repayment of this credit, showing that clearly I understood that this was an interest-free loan that I have to repay. All in all, I sent 27 pages to the IRS telling them that they were mistaken.

The matter was officially resolved in June of 2011 (after multiple letters from the IRS saying “the matter was in the process of being reviewed” and they would respond within 30 days) in which the IRS said the changes to my 2008 income tax return were incorrect and that I officially did not owe the US government $9,000.

Needless to say, I’m terrified to ever do a tax return (and yes, IRS, I’ll do them, but seriously, am I going to be audited again? ‘Cuz that sucked, and I told the truth the whole time), and I owe my mother/Aunt Heide my financial well-being. I’m forever grateful.

Also, if you got the First-Time Homebuyer’s Credit, be prepared to be audited.

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