The internal watchdog for the U.S. Internal Revenue Service is expected to warn the agency for the fourth time about fraud in the multibillion dollar homebuyer tax credit program, according to a report to be released at a congressional hearing later this week.

About 1.4 million tax returns have been filed to take advantage of the United States' $8,000 credit and many lawmakers want to extend the credit, which expires on November 30. It has cost the U.S. government about $10 billion.

The IRS faces significant challenges preventing individuals from scamming the tax credit program, the inspector general for tax administration for the U.S. Treasury Department will tell lawmakers on Thursday.

The inspector general found at least 70,000 tax credit claims, totaling $489 million, were granted to individuals who do not appear to qualify for it. These include those who had filed recent mortgage interest deduction forms, indicating they do not qualify.

Potential for fraud exists whenever a new refundable credit is put in place and the agency will vigorously pursue those it believes have filed fraudulent claims, IRS spokesman Frank Keith said.

The agency has opened 107,000 civil cases related to the credit and identified 167 criminal schemes, he noted. In addition, we have selected thousands of returns for those claiming the credit for deeper examination. he said.

The law creating the tax credit for those who meet certain income limits was enacted to help jump start the moribund housing market. Critics say it doles out funds to those who would have purchased a home anyway.

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.

The issue of fraud in the tax credit program surfaced in November 2008 when the inspector general warned internal IRS controls were not adequate to prevent scams. The IRS disagreed with a recommendation a third party verify a home purchase, arguing it would be burdensome to homebuyers.

The IG also warned the agency about fraud in March and September of 2009.

The IRS installed computer filters, after an IG recommendation, so those who filed for a home mortgage interest deduction could not also claim the first-time tax credit.

A bipartisan group of lawmakers, including Senate Majority Leader Harry Reid, want to extend the credit, with some wanting to double it and broaden it to all homeowners.

We can't let fraudulent activity undermine a program that has benefited so many, the IRS spokesman, Keith, said.

(Editing by Andrew Hay)