Despite back-to-back snowstorms that shut federal offices for days, the Internal Revenue Service issued new guidance last week on the two tax-credit programs that are powering the country’s real estate markets — the $6,500 credit for repeat buyers and the $8,000 first-time-buyer credit.

The new policy clarifies what documentation taxpayers need to submit to obtain either credit. When Congress revised the programs in November, it ordered the IRS to tighten its rules and monitoring to curtail widespread fraud that had emerged last year.

This included fictitious home purchases in which people received $8,000 checks from the government for transactions that had never occurred. In some cases, federal auditors found that fraud ringleaders were submitting multiple claims for credits and splitting the government payouts with people who had no financial ability to buy a house.

To avoid such abuses in the revised credit program — which is scheduled to be available for qualified purchases closed through June 30 — Congress directed the IRS to spell out documentation standards in detail and to install monitoring systems to spot fraud upfront. Among the keys to the monitoring system is that all documentation accompanying credit claims must comply with the IRS’s detailed rules. Here’s what the agency wants from anyone seeking a credit:

– A fully executed IRS Form 5405 (available at http://irs.gov) on which taxpayers provide basic information supporting their claim of eligibility, including income and home purchase date.

– A copy of the settlement statement proving that the sale and purchase transactions actually took place. In instructions to taxpayers issued last month, the IRS said the settlement statement should show “all parties’ names and signatures, property address, sales price, and date of purchase. Normally this is the properly executed Form HUD-1.”

The problem, however, is that home closing and settlement customs vary from state to state, and sometimes the HUD-1 does not contain both the seller’s and the buyer’s signatures. In escrow states such as California, where settlements are not sit-down affairs bringing together sellers and buyers, both sets of signatures might not appear on the HUD-1 received by the buyer.

In California, buyers sign an estimated closing statement or an estimated HUD-1 “at the time they sign their loan documents,” said Donna Grosso, president of the California Escrow Association. Sellers have their “estimated closing submitted to them for their review and signature during or near the same time period as the buyer. We prepare the final closing statement or the final HUD-1 on the closing date,” which is the date of recordation.
As a result, Grosso said, “we do not have the buyers or sellers available to sign the final closing statement.” This seems to create an obstacle to meeting the IRS’s instructions and makes it more likely that applicants’ claims will be rejected or delayed for special review.

The agency tried to address that issue Feb. 12 by loosening its requirements. “In areas where signatures are not required on the settlement document, the IRS has clarified that it will accept a settlement statement if it is completed and valid according to local law,” the agency said. “The IRS encourages those buyers to sign the settlement statement prior to attaching it to the tax return.

In situations where the signature of the seller is not on the settlement document, the IRS advises the buyer to still sign the document.”

Despite the fact that Form 5405 continues to require all parties’ signatures on the HUD-1 or settlement document, the agency is now essentially saying: “Don’t worry about it. As long as your settlement statement conforms to prevailing local practices, we’ll accept it.”

This could be important for large numbers of repeat and first-time buyers who are planning to file for the credit with this year’s tax returns and want to be sure they get through the IRS’s tougher standards. Nationwide, according to estimates by the National Association of Realtors, 1.5 million repeat purchasers and 900,000 first-timers are expected to apply for credits this year.

What else does the IRS want to see on claims from home buyers? For repeat purchasers, the agency wants documentation that, before their latest purchase, they had lived in their former property for a consecutive five years out of the past eight years. This may include property tax records, hazard insurance records or copies of annual mortgage interest statements filed with their federal taxes.

One caveat for filers: Because of the increased documentation and monitoring, IRS processing will take four to eight weeks. So don’t expect your $6,500 or $8,000 check overnight.

Joseph Gorto, ready to buy a Mazda sport-utility vehicle in 2006, decided his most inexpensive option was to use his Chase credit card with a 4.9 percent annual interest rate.
He chipped away at the balance slowly and steadily, until a bill arrived last year showing his minimum monthly payment had skyrocketed from $200 to $500.

“I called them on the phone and spoke to the supervisor and they pretty much said, “Tough, that’s the way it’s going to be,’ ” said Gorto, a 65-year-old Berkeley resident.

Lawmakers hope stories such as Gorto’s become increasingly rare through a law designed to give consumers more protection.

Experts say the law stamps out abusive practices that in the past have caused anger and confusion among consumers. But it also ushers in a new era in which credit will be harder and more expensive to get. Gone are the days when even consumers who had filed for bankruptcy returned home to see credit-card applications in the mail.

“I think we’re moving . . . away from the borrow-and-spend mentality that was predominant during the last decade,” said Patrick J. O’Keefe, an economist with the J.H. Cohn accounting firm based in Roseland.

Credit-card customers long have complained about high interest rates, hidden fees and microscopic fine print that have made it easy to get into debt and difficult to dig out. And their experiences in the past year only have added to their grievances.

Consumers won’t easily be caught by surprise in the future because of the Credit Card Accountability, Responsibility and Disclosure Act of 2009. The rules rein in some credit-card company practices and make others more transparent.

Although some of the rules already are in effect, the brunt of the legislation takes hold on Monday. Among the highlights, according to the Federal Deposit Insurance Corp.:

Credit issuers can’t raise interest rates on existing balances unless consumers are at least 60 days late or have a variable interest rate.

Statements must include a box showing how much cardholders have paid in interest and fees during the year and warnings about the high cost of making only the minimum payments. They also will show the monthly payment required to pay off the existing balance in 36 months.

Consumers younger than 21 can’t have a credit card unless they submit a written application that includes the signature of a co-signer over 21.

Not that the regulations thwart credit issuers completely. They still allow banks to raise interest rates on future purchases and impose charges such as fees on purchases abroad or for having a zero balance, according to the Center for Responsible Lending, a consumer group.

“Biggest thing”
But “on the face of it, it’s really the biggest thing that’s ever happened in terms of credit-card legislation,” said Ben Woolsey, director of consumer research for CreditCards.com, an Austin, Texas-based Web site that follows the industry. “It’s a very pro-consumer piece of legislation.”

The extent to which lenders have raised interest rates and fees to skirt the new rules isn’t clear. They might have taken similar steps even without the changes, since the economy is undergoing a shakeup.

But the housing bubble collapsed. The financial damage spread throughout the economy. Workers lost their jobs, took pay cuts and curtailed spending. And bank loans — including credit cards — became delinquent.

As of the third quarter of 2009, banks didn’t expect to be paid back on 10.2 percent of their credit-card loans, up from 5.7 percent the previous year, the Federal Reserve said. It prompted lenders to change the terms of cards, even on its best customers, an industry spokesman said.

Losses drive changes
“It’s not necessarily you, unfortunately, because we’re all in this together,” said Peter Garuccio, spokesman for the American Bankers Association, a Washington, D.C., trade group. “When you make 10 loans of $100 each and one person doesn’t pay you back, you’re lending out $1,000 and only getting $900 in return. You can’t stay in business. Losses have certainly driven changes in interest rates.”

The new age of austerity already has begun. The amount of credit-card debt has fallen by 9.5 percent during the past year, and Americans are saving close to 5 percent of their disposable income, up from barely 1 percent in early 2008, government statistics show.

Banks “could make the case to say being more restrictive is good business and sound public policy,” J.H. Cohn’s O’Keefe said. After all, the recession was caused by consumers who couldn’t pay their debts.

But that would be a tough sell to consumers who have been outraged by the financial-services industry. Taxpayers prevented banks from failing. Now many of them are seeing the terms of their credit cards become tighter when they could use the help.

After Joseph Gorto learned his minimum payment was rising, he said he called his card company for an explanation. The representative said it would help him pay off his loan more quickly.

He said if he could pay it off faster, he would. “I can’t afford any more than that,” he said.

More and more it seems, businesses no longer accept checks (unless, perhaps, with a pint of blood or my firstborn). It is becoming a cash, debit or credit-card system.
According to Visa, debit cards overtook credit cards last December as the payment of choice.

With personal finances being what they are, many feel debit cards provide a greater sense of control and are safer than cash. Many use a debit card as a spending- control mechanism for students or debt-laden consumers trying to pay off their bills and not wanting to take on more debt.

Some consumers are using debit cards in a backlash against credit-card companies raising annual interest rates (some as much as 36 percent), slashing credit limits and instituting fees in response to upcoming new regulations.

The debit charge is linked directly to your bank account, while the credit card is a charge against a preapproved credit limit.

Other than that, the cards are becoming more and more similar, particularly how it relates to cardholder liability. Federal regulations require financial institutions to cap your liability at $50 if you notify your financial institution within two business days from the moment you learn that your debit card has been lost or stolen. Some have gone beyond federal regulations and adopted zero cardholder liability policies on unauthorized use of debit cards with adequate specified notice.

Despite the safeguards, especially at this time of year, debit-card users must take precautions.

Protect your debit card as you would cash or a credit card. Start by thinning out the number of cards you carry in your wallet – one to three is probably all you truly use. Then make photocopies of all cards (front and back) remaining in your wallet and store those photocopies in a secure location. Then, as much as I hate to suggest you add another number to remember, it is prudent to select a PIN or electronic password that can’t be guessed easily (not your birth date or personal names – mix numbers and symbols in your PIN). Memorize it. It doesn’t do much good if you write it on your card!

With the advent of banking online, it is much easier to check your account frequently and ensure all debits made are yours.

Another area that demands attention is overdrawing your account. Many institutions do not honor the overdraft protection on the debit card (though they do for checks).

The Federal Reserve recently imposed rules that will make it harder to slap customers with overdraft fees. These rules will prohibit banks from charging overdraft fees on automated teller machine and one-time debit-card transactions unless the consumer opts in to the overdraft service for those types of transactions.

You can avoid overdraft headaches with debit cards simply by keeping track of transactions and recording them – that old-fashioned checkbook register.

If you do use an overdraft line of credit, repay it as quickly as possible (though mine is still a lower interest rate than my credit card). Finally, know your limits as well as the financial institution’s limit as to daily withdrawals, especially at this time of year.

Starting on July 1st, the Federal Reserve has required banks to get consent from customers before enrolling them in overdraft protection programs so they can experience the excitement of cascading overdrafts. The problem is that consumers may be trading overdraft fees for insufficient funds fees and good old-fashioned bounced checks…and end up worse off in the long run.

Bob Sullivan at the Red Tape Chronicles looked at financial life under the new rules, and offers advice based on your financial situation.

“If you have overdrawn your account in the past year, think before you opt out. A bounced check can have more far-reaching consequences than an overdraft fee. You might end up in the ChexSystems database and lose check-writing privileges, for example. So don’t opt-out until you are ready to stay out of the red.
Consumers who live near a zero balance will find that so-called “account holds” placed on debit purchases by gas stations and some other businesses can cause headaches in a post-overdraft-fee world. Holds, which exceed the transaction price, can freeze funds for days and cause confusing time lags. Be cautious using your debit card for purchases at firms that place holds. One tip: If you must use debit, use a PIN instead of a signature. PIN-debit transactions generally are processed faster than signature-debits, so that will help you keep your account balance up to date.”

Of course, the best way to prevent issues with overdrafts is to not let your bank account hover near zero. However, life happens, and sometimes that’s not possible.

NEW YORK — Shoppers are doing all they can to keep their credit cards in their wallets this holiday season.

They’re paying with cash, direct debits from bank accounts, taking advantage of free financing and even cashing in frequent flier miles.

A desire to stick to a budget and to avoid interest rates that have risen sharply have helped drive a marked shift away from credit cards. Banks have also reduced the amount of credit they’re making available, even to low-risk clients.

“Consumers are looking for discipline in their spending levels that they can achieve from using cash,” said Bryan Eshelman, managing director in the retail practice of consultant AlixPartners, whose recent survey of shoppers revealed their top concern was eliminating personal debt.

Often, the switch to cash or debit cards means lower costs for stores, though merchants miss out on getting data on their customers’ shopping habits from credit card transactions.

Layaway and other payment methods increase costs, but they can be offset by new opportunities to grab sales from customers who would otherwise not able to buy.

Bill Hampel, chief economist at the Credit Union National Association, describes the consumer switch as “seminal.”

“People are trying a lot of new behavior in how they’re spending and how they are paying for it in response to a very scary economy,” he added.

Some new habits, particularly using more cash, will likely linger, with unemployment expected to remain high for several years and credit lines less generous.

Among the ways payment methods are shifting:

_ CASH AND ITS COUSINS:

Credit cards accounted for 60 percent of transactions at malls operated by Taubman Centers so far this holiday season, down from 70 percent last year, according to an internal survey.

Earlier this year, U.S. debit payment volume exceeded that of credit for the first time, Visa Inc. reported.

PayPal, an online payment service owned by eBay Inc. that lets shoppers pay directly from their bank accounts in addition to traditional credit, saw its active accounts surge 20 percent in its latest quarter compared with a year ago.

A report from the Federal Reserve issued Dec. 7 showed how Americans borrowed less for a record ninth straight month in October.

_ ALTERNATIVE PAYMENTS:

Stores have responded by promoting alternative ways to pay and offers that defer payment for several months.

Sears and Kmart are now offering store card holders who spend just $99 or more a chance to borrow at no cost for six months. A year ago, shoppers had to spend at least $199.

Others are prominently touting Bill Me Later, which offers free financing, usually for 90 days. Gourmet food purveyor Harry & David put the Bill Me Later logo on the front of its holiday catalog. If the purchase is not paid off on time, customers get charged 19.99 percent interest that accrues over that time.

Merchants pay fees for Bill Me Later and PayPal, which take anywhere from a 1.9 percent to 2.9 percent cut. That’s slightly lower than credit cards interchange fees, which range from about 2 percent to 3.5 percent, according to Curtis Arnold, founder of CardRatings.com, a credit education site.

Forrester Research estimates that PayPal and similar payment services, which is any method that’s not just typing in one’s credit or debit card, now represent 11 percent of total online payments.

Layaway, which lets shoppers pay over time interest-free while the store holds onto the item, also has made a comeback. This payment method had its roots in the Great Depression but became passe in the past two decades with the rise of credit cards.

In the tough economy, layaway is booming at stores like discounter Fred’s Inc., which saw it increase sixfold in the latest quarter. But it’s also shedding its image as a tool for the poor.

Layaway allows shoppers to pay over time, interest free, and pick up their goods when they’re paid in full.

Shoe seller Foot Locker Inc. has big signs promoting free layaway on storefront windows.

Toys R Us, whose customers hadn’t requested layaway in the past, has seen interest spike and has come around to a different way of thinking. It’s paying off.

The nation’s largest toystore chain unveiled layaway this fall for big items like bikes and video game consoles. It says customers were largely parents who wanted to be able to pay over time and those who were looking for a place to store their gifts.

“In our case, layaway had more to do with convenience and peace of mind,” company spokeswoman Kathleen Waugh said. She added there was no stigma attached to the service — if it means customers can get the right toy for their child.

_ GETTING CREATIVE:

Customers such as Loretta Prencipe, a freelance marketing professional, are getting creative. In Christmas seasons past, the Alexandria., Va., resident and her husband had charged hundreds of dollars on two credit cards. This year, she used cash for most purchases, while trading in 13,000 frequent-flyer miles from United Airlines to buy a $100 gift card from a restaurant — she plans to also use the miles to buy several $25 gift cards from Barnes & Noble.

“We are trying to make smarter decisions with our money,” said the mother of two teenage daughters.

Sergio Pinon, founder and chief marketing officer at e-layaway.com, which offers online layaway for about 1,000 merchants, has seen his business quadruple from last Christmas. He had expected it to double.

Even more interesting, he said, is that customers started setting aside money for gift cards for themselves starting this past summer as a way to budget their overall holiday spending. That has resulted in the average value of single gift cards rising to $100 from $25 a year ago.