More than 1,200 prison inmates, including 241 serving life sentences, defrauded the government of $9.1 million in tax credits reserved for first-time homebuyers, according to a Treasury Department report released Wednesday.
Treasury's inspector general also found that thousands of people filed multiple claims or made claims outside the allotted time period. In all, more than $28 million was improperly doled out.
The Internal Revenue Service program at issue is meant to stimulate the housing market by giving tax credits of as much as $8,000 to qualifying first-time home buyers.
"Additional controls are necessary to address erroneous claims for the credit," the report stated. "Further, fraudulent and questionable claims processed prior to implementation of controls will need follow-up action by the IRS."
According to the report, 4,608 state and federal inmates filed for these tax credits, and that fraudulent refunds were doled out to 1,295 of them.
The inspector general's report said the most "egregious" fraudsters were 715 prison lifers, including 174 who filed with the help of paid preparers. From this group, 241 lifers were awarded $1.7 million.
The problem was particularly bad in Florida: 61% of the lifers who got credits were incarcerated in the Sunshine State.
"It is possible for an inmate to buy a house while in prison," said Jo Ellyn Rackleff, spokeswoman for the Florida Department of Corrections. "We have inmates in Florida prisons who still have businesses outside. Many of the inmates have families with children who live outside."
She said that one of the reasons why Florida inmates feature prominently in the Treasury report is because the Florida prison system is transparent in providing inmate information to the IRS.
"We provide [the IRS] with data quarterly," she said. "If we receive an IRS check in the Post Office of an institution, the IRS will receive a call that we received a check, to make sure it's all legitimate."
The homebuyer tax credit program was very specific about the time period in which homebuyers were allowed to participate, though this rule seems to be the most widely violated. The credit was for home purchases that happened after April 8, 2008, with a cut-off date that was eventually extended to May 1, 2010.
The report found that the IRS awarded $17.6 million to 2,555 filers who had bought their homes before the credit program kicked in.
The inspector general also identified 206 filers who claimed the credit for multiple addresses; these fraudulent filers were awarded a total of $1.4 million.
The report also found that improper filers included 34 employees of the IRS. This is in addition to 53 IRS employees that the inspector general identified last year as improper filers.
The report included a response from the IRS, which highlighted the huge scope of the program, with $12.6 billion in claims awarded to 1.8 million participants. The IRS said it had ramped up efforts to crack down on criminal activity and would continue to review claims and "recapture" pay-outs determined to be fraudulent.
The IRS said it "has devoted substantial resources to working with state and federal prison systems to collect and maintain information on the prison population."
But the agency added, "The prison population changes frequently and it is simply not feasible for the IRS to maintain 100% accurate records based on information that is reported to us voluntarily by the various prison authorities." The agency suggested that Congress require prisons to report inmates' status to the IRS.
In an e-mail to CNNMoney.com, IRS spokesman Anthony Burke said the agency had "successfully blocked or denied nearly 400,000 questionable homebuyer claims and opened more than 150 criminal investigations. These aggressive efforts have saved taxpayers more than $1 billion."
As for the IRS employees, the agency said that it was working to identify those at fault.
Assistant Treasury Secretary Michael Mundaca said that, despite its problems, the homebuyer tax credit helped to spur more than 2.5 million new home purchases and helped to stabilize the housing market.
"These fraudulent claims, which are being pursued to the fullest extent of the law, represent less than half a percent of the credits paid out under this program," he said, in an e-mail to CNNMoney.com. "As with all new and expanded programs, we are constantly working to improve implementation, and the IRS has already begun to take additional steps to prevent fraud in this program."