Tax fraud by prisoners rising, report finds

A report from a watchdog agency found that the IRS paid $112 million in fraudulent refunds to prisoners.
A report from a watchdog agency found that the IRS paid $112 million in fraudulent refunds to prisoners. (Matt York)
By Ed O'Keefe
Washington Post Staff Writer
Thursday, December 2, 2010

More than 48,800 of the nation's prisoners claimed $130 million in fraudulent tax refunds by March of this year, and the numbers are probably much higher, according to a new watchdog report. The IRS paid $112 million of the claims, a small fraction of the $326 billion in refunds this year.

The number of fraudulent payments to inmates has climbed 37 percent since 2004, said the report, which acknowledged that the rise is partly a result of increased detection and enforcement by the IRS.

The IRS doesn't screen most prisoners' tax returns, according to the report by the Treasury Inspector General for Tax Administration (TIGTA), set for release Thursday. A review of tax records found that 88 percent of the 287,918 returns filed by prisoners by late March were not screened for potential fraud. Of those, about 48,800 returns lacked wage information reported to the IRS by employers, the report said.

"There is a major problem with returns being filed fraudulently by people who are incarcerated," TIGTA Inspector General J. Russell George said in an interview. "What makes this even more problematic is that we identified this as a problem more than five years ago. The problem not only persists, it's gotten even worse."

In 2005, TIGTA found that 18,000 prisoners had filed fraudulent returns in 2004. The report prompted a 2008 law that requires George to file regular updates on prison-based tax fraud. The number of bad claims has climbed because the IRS has stepped up detection and enforcement, and because more prisoners are making fraudulent claims, TIGTA and IRS officials said Thursday.

The IRS "is making very good progress" in identifying cases of fraud, George said. Overall, in the general population, the agency stopped almost 250,000 fraudulent returns totaling $1.48 billion through March, double the number from the 2009 filing season.

"The IRS takes refund fraud seriously and has programs in place to aggressively combat it," agency spokesman Terry Lemons said in a statement.

Tracking prison fraud "is not a simple process, particularly considering the fact that some inmates and their families are legally entitled to tax refunds and that the prisoner population is constantly changing," he said.

The agency is working with state and federal officials to ensure timely updates and last summer met with federal prison officials to improve detection and prevention of prisoner fraud, he said.

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