IRS making inroads in stopping inmate tax fraud

January 18, 2013

The Internal Revenue Service detected more than 173,000 fraudulent tax returns from prison inmates last year, many of them using stolen identities and other false information in an attempt to get tax refunds. That’s more than twice the number of fraudulent returns detected from inmates in 2010, according to a report released Thursday by the Treasury Department’s inspector general for tax administration.

In all, the IRS says it stopped inmates from illegally claiming $2.5 billion in tax refunds in the 2012 budget year. About $1.1 billion was claimed by just two inmates.

The report credits the IRS and prison officials with stepping up enforcement and sharing more information, but it says more can be done to stop tax fraud among inmates.

“Refund fraud committed by prisoners remains a significant problem for tax administration,” said J. Russell George, the Treasury inspector general for tax administration.

The heavily redacted report contains few details about inmates’ scams and no information about how two prisoners thought they could get the federal government to send them more than $1 billion. Tax information, even for inmates, is private by law, unless a person gets charged with a crime involving the information.

Over the years, investigators have found that crafty inmates will go to great lengths to try to steal identities or trick the IRS into sending them a refund they don’t deserve, said Karen Kraushaar, spokeswoman for the IG.

Some inmates scour obituaries, looking for identities to steal. Others use the identities of fellow inmates or even their own. Some use their access to computers to file tax returns online. They can have refunds electronically deposited into the bank accounts of friends on the outside.

Some inmates have identified businesses that have filed for bankruptcy and claimed to work there, using the bankruptcy as an excuse for why the company didn’t send them a W-2 form.

In 2010, the IG’s office found that nearly 50,000 prison inmates claimed more than $130 million in tax refunds without providing any wage information to the IRS, according to a 2010 audit. That same year, the IG found that nearly 1,300 prison inmates had improperly received more than $9 million in home-buyer tax credits while they were locked up.

“Most taxpayers find e-filing to be quick and easy. Unfortunately, some bad guys have also found it a quick and easy way to commit fraud,” Kraushaar said. “To the IRS’s credit, our report found that they are doing a much better job of stopping such fraudsters in their tracks. But more needs to be done.”

Prison inmates may have legitimate reasons to file tax returns and get refunds, especially if they are newly incarcerated or have investment income. But the IRS gives special scrutiny to returns from inmates, when the agency is able to identify them, said Michelle Eldridge, an IRS spokeswoman.

The IRS has been helped by several recent laws that require the agency and state and federal prison officials to share information about inmates. The agency now maintains a master file that is supposed to include information about every inmate in state or federal prison.

The new IG report, however, found discrepancies. For example, six closed prisons in Michigan and 10 closed prisons in North Carolina reported having inmates last year, according to the report.

New federal reporting requirements went into effect last year for federal and state prisons, Eldridge said. “While this was a substantial step forward in refining and improving the accuracy of the prisoner file, there are still significant challenges in getting complete and consistent data from the multiple jurisdictions involved,” she said.

— Associated Press

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