As if tax fraud by people outside of prison is not bad enough, prisoner tax fraud has ballooned in recent years. In 2010 more than 91,000 inmate returns claimed $758 million in fraudulent refunds, a new audit from the Treasury Inspector General for Tax Administration disclosed Jan. 17. In 2009 it was not quite $300 million and even less the previous year.
The report revealed that the IRS stopped inmates from illegally claiming $2.5 billion from more than 173,000 fraudulent tax refunds during the 2012 budget year. About $1.1 billion was claimed by just two 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 said IG spokeswoman Karen Kraushaar.
However law enforcement and identity theft experts have known their techniques for years. Some inmates scour obituaries, looking for people's 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 who probably get a cut of the take according to an IRS presentation for the American Correctional Association Conference.
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 according to the Treasury inspector general.
One inmate pleaded guilty this week to filing seven fraudulent tax returns, claiming refunds totaling $3.5 million. He falsely reported that he had earned significant wages and had tax withheld from a nonexistent company called Safety Shoes & More, Inc. He received nearly $3 million from the IRS due to the scheme.
Former prisoners report that inmates found annual reports in the library from big corporations that listed federal tax identification numbers and claimed they worked for them on 1040 forms. They picked companies big enough that they figured it would take the IRS a long time to verify their claims. Some prisoner tax fraud has also been linked to organized crime rings.
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 all reported having inmates last year, according to the report.
Unfortunately the report failed to mention the impact on innocent citizens and businesses whose information was used to commit tax fraud and will need to untangle the mess left behind.