Four-year-olds are adorable, trustworthy, and, having never owned a home before, fully eligible for the first-time homebuyer tax credit that Congress passed in 2008.

As a result of that loophole and numerous faulty reporting mechanisms, a House panel learned Thursday of tens of thousands of cases of fraud in the tax credit program, including more than 500 instances of people using their children -- including a four-year-old -- to apply for the credit to get around income caps and a requirement that the purchaser has never owned a home.

Together, fake or faulty claims for the $8,000 refundable tax credit may have cost the government up to half a billion dollars so far, investigators told the Ways and Means subcommittee.

Russell George, an inspector general with the Treasury Department, told the subcommittee about the most brazen instances of bogus claims that he had come across since the IRS created a filtering system last May to weed out suspicious applications.

George said he had found nearly 20,000 returns for people who may not have actually purchased homes; thousands for people who already owned homes; 3,200 taxpayers who could not prove they were in the country legally; and an unspecified number of IRS employees wrongly applying for the credit.

"Based on the administration of the credit to date, I am very concerned about the IRS' ability to effectively administer the credits that are claimed before the December 1st deadline, let alone any credits that may be claimed within future extended deadlines," George said.

The temporary program was created by Congress in 2008 to jolt the weakened housing market and was renewed and expanded in 2009 by the $787 billion stimulus bill. This week Sens. Chris Dodd (D-Conn.) and Johnny Isakson (R-Ga.) began a push to expand the credit to all homebuyers and extend the deadline, now set for Nov. 30th, to July 2010.

Rep. John Lewis (D-Ga.), chairman of the subcommittee, said that 1.4 million families have claimed nearly $10 billion in credits, but that the speed of implementing the program meant policing fraud was at first unacceptably poor. "We want to and we need to stop this fraud and abuse," he said.

Rep. Charles Boustany (R-La.), the ranking member of the panel, said, "If Congress decides to extend the homebuyer tax credit, both Chairman Lewis and I believe Congress should consider reasonable proposals to reduce fraud and improve the IRS' ability to administer this credit."

Among the solutions witnesses recommended: Requiring additional documentation from homebuyers; reviewing applications sooner; and creating a minimum age for applicants. There is currently no law limiting the age of tax credit recipients.

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