Published: Thursday, 22 Oct 2009 | 10:21 AM ET

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Thousands of individuals claiming the first-time homebuyer's $8,000 tax credit may have been attempting to scam the system, including purported four-year-olds and illegal immigrants, according to a watchdog report released on Thursday.

Nearly 74,000 individuals who claimed the tax credit did not appear to qualify for it, at a cost of half a billion to the government, the inspector general for tax administration for the U.S. Treasury Department said in a report to be delivered to lawmakers on Thursday.

"Some of our findings, while preliminary, are somewhat disturbing," inspector general Russell George said in an interview. Among the most striking instances of fraud include four-year-olds, non-U.S. citizens and IRS employees inappropriately claiming the benefit, he said.

The report comes amid a heated debate about the popular credit, which the real estate and homebuilding industry is fiercely lobbying to protect. It expires at the end of November, and some say it simply doles out cash to those who would have purchased a home without it.

A subcommittee of the tax-writing Ways and Means Committee in the U.S. House of Representatives will hear from IRS, IG and other officials at a hearing Thursday.

About 1.4 million tax returns have been filed to take advantage of the credit at a cost to the government of about $10 billion. Many powerful lawmakers want to extend it, including some that back broadening it to all homebuyers and doubling its benefit.

Extension in its current form would cost about a $1 billion a month. A proposal in the Senate to double the credit and extend it until June would cost about $17 billion.

In response to a report last week citing thousands not qualifying properly for the credit, the IRS said it intends to vigorously root out fraud in the program.

An IRS spokesman also said potential for fraud exists whenever a new refundable credit is put in place. The agency has opened 107,000 civil cases related to the credit and identified 167 criminal schemes. Also, they have selected thousands of returns for those claiming the credit for deeper audits.

The report finds that 582 taxpayers under the age of 18 claimed about $4 million using the credit, with the youngest being 4 years old.

It further faults the IRS for failing to take its advice that a third party be required to document an individual claiming the credit actually purchased a home.

The IRS refuted some of the findings of the IG, and argued for example that some findings are premature because some taxpayers may eventually purchase a home.

Under the law, the credit should be claimed after purchase.

The IRS has responded to some of the IG's advice, including installing computer filters so those who filed for a home mortgage interest deduction could not also claim the first-time tax credit.

"The IRS is having a very mixed bag in terms of its implementation of this important tool to help the economy," George said.

A 2008 law created a $7,500 tax credit for those who haven't purchased a home in three years and who meet certain income limits, with the intention of jump starting the moribund housing market. A 2009 law boosted the credit to $8,000.

A bipartisan group of lawmakers, including Senate Majority Leader Harry Reid, want to extend the credit but the housing chief for the Obama administration on Tuesday expressed doubts the United States could afford to extend the credit.

Housing and Urban Development Secretary Shaun Donovan said the administration would decide in coming weeks whether it backs an extension.

• Slideshow: Highest End Real Estate

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