Despite efforts by the Internal Revenue Service to prevent tax fraud by prison inmates, the problem has been growing with the amount of fraudulent tax returns filed by prisoners and identified by the IRS increasing from more than 18,000 in calendar year 2004 to more than 91,000 tax returns in 2010, with the refunds claimed on these returns climbing from $68 million to $757 million.

J. Russell George

A new report from the Treasury Inspector General for Tax Administration found that more improvements are needed to stop prisoner tax fraud.

“Refund fraud committed by prisoners remains a significant problem for tax administration,” said TIGTA Inspector General J. Russell George in a statement.  “While many of the problems our auditors found are beyond the control of the IRS, the IRS must take steps to improve its validation and verification processes.”

The overall objective of TIGTA’s audit was to assess the reliability of the IRS Prisoner File, information collected by the Federal Bureau of Prisoners and State Departments of Corrections recording information on prisoners. The majority of inaccuracies identified in the file are due to misinformation on individual prisoners. The accuracy and reliability of the Prisoner File affects the IRS’s ability to stop fraudulent refunds, TIGTA found.

However, the IRS lacks the authority to disclose to the prisons any information related to fraudulent tax returns filed by prisoners, limiting the ability of prison officials to curtail abuse of the tax system by inmates. As a result, the controls that are supposed to ensure the IRS identifies fraudulent refunds on tax returns prepared by prisoners are not fully effective.

TIGTA found that of the 2.8 million records on the 2012 Prisoner File, 2.3 million, or 82 percent, matched the information on the Social Security Administration’s records. Information was missing in approximately 260,000 records, and 240,000 records did not match the information maintained by the Social Security Administration.

TIGTA recommended that the IRS compare prison and prisoner files to ensure that all facilities that house prisoners reported them. In addition, legislation is needed that would permanently authorize the IRS to share data with the prisons.

IRS management agreed to continue to assess the effectiveness of the validation activities performed on the Prisoner File. However, IRS management contended that new programming and procedures will be deployed this year that will help stem the problem, which will include certain validation activities and verifications. TIGTA, on the other hand, said it believes the new programming and procedures are unrelated to the Prisoner File validation process and will not ensure the reliability and accuracy of the Prisoner File.

“We are committed to maintaining good working relationships with the correctional agencies and ensuring they understand our need for accurate data,” wrote Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division. “We believe these efforts will continue to improve the accuracy and reliability of the prisoner file. With regard to long-term improvements in the availability of reliable information on the prisoner population, the IRS, as the report notes, is working with the Office of Management and Budget, the SSA, FBOP [Federal Bureau of Prisons], and other federal agencies to identify actions necessary to promote the efficient and effective sharing of prisoner data within government.”