Tax refund fraud associated with prisoner Social Security Numbers remains a growing problem for tax administration despite the Internal Revenue Service’s efforts to curb it, according to a new government report.
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Reports issued by TIGTA in December 2010 and December 2012 identified concerns with the IRS's efforts to identify and prevent prisoner tax fraud. The objective of TIGTA's latest audit was to evaluate the effectiveness of the corrective actions that the IRS has taken to address conditions identified in a prior TIGTA review of prisoner tax fraud. The report found that the actions have not yet proven to be effective.
"Since TIGTA first began documenting this fraudulent activity four years ago, refund fraud committed by prisoners has grown to become a billion dollar problem," said TIGTA Inspector General J. Russell George in a statement. "While the IRS has agreed with four of our six recommendations, more needs to be done, as is explained in our report. It is incumbent upon the IRS to act aggressively to prevent tax fraud wherever it occurs, particularly behind bars."
In its new report, TIGTA found that the IRS has not yet shared fraudulent prisoner tax return information with federal or state prison officials. TIGTA also found that the required annual prisoner fraud reports to Congress are not timely and that the reports do not address all aspects of prisoner fraud. TIGTA also followed up on a condition identified in a past review and found that IRS processes still do not ensure that all tax returns filed using a prisoner Social Security Number are assigned a prisoner indicator.
TIGTA recommended that the commissioner in charge of the IRS’s Wage and Investment Division ensure that memoranda of understanding are established on a timely basis with the Federal Bureau of Prisons and all state corrections departments. The IRS should also ensure that the required annual report on prisoner fraud is issued to Congress in a timely manner, TIGTA suggested.
In addition, the report recommended that the IRS should ensure that processes are developed to identify tax returns filed that have the same characteristics of confirmed fraudulent prisoner tax returns and determine whether these tax returns should be included in the annual report to Congress it must make as required by law. The IRS should also ensure that all tax returns that are filed using a prisoner Social Security Number are assigned a prisoner indicator, according to TIGTA. Lastly, the IRS should identify and address the cause of the cases TIGTA found that were not identified with a prisoner indicator.
The IRS agreed with four of TIGTA's six recommendations. The IRS did not agree to develop a process to identify other tax returns that have the same characteristics as confirmed fraudulent prisoner returns. But TIGTA contended that without such processes, the IRS annual report will not include the required information related to the filing of all false and fraudulent tax returns by prisoners.
In addition, the IRS did not agree to correct a computer programming error that resulted in not assigning a prisoner indicator to 3,139 tax returns that TIGTA identified. Without the proper assignment of a prisoner indicator, the tax returns are not sent through those fraud detection filters specific to a prisoner-filed tax return, TIGTA pointed out.
The IRS agreed to work toward obtaining signed memoranda of understanding with the Federal Bureau of Prisons and State Departments of Corrections and established a goal to issue the calendar year 2014 Prisoner Fraud Report by Sept. 30, 2015.
“The IRS has continued to build on processes to detect and stop potentially fraudulent refund claims made by prisoners,” wrote Debra Holland, commissioner of the IRS’s Wage and Investment Division, in a statement. “We have worked with the Federal Bureau of Prisons and State Departments of Corrections to improve the quality and reliability of data used in compiling the annual file of incarcerated individuals. The file is used by our major processing systems to identify returns filed using Social Security Numbers to identify potential fraud and other compliance issues affected by an individual’s incarceration status.”
The IRS issued an additional statement Tuesday in response to the report. “We are stopping more prisoner refunds and the percentage of fraudulent refunds prevented by the IRS continues to grow,” said the IRS in a statement emailed to Accounting Today. “The IRS has programs to aggressively combat prisoner refund fraud. When accurate prisoner data is available, the IRS is very successful at detecting and stopping incorrect refunds and prevents the vast majority of refunds from fraudulently going to inmates. Our systems provide special scrutiny to reviewing prisoner refunds, and we continue to increase our efforts.
“The IRS has been in touch with all 50 state Governors, the Federal Bureau of Prisons and the District of Columbia, as well as the Departments of Correction in each state inviting them all to collaborate with the IRS in our efforts to deter tax fraud by inmate and prisoner tax fraud,” the IRS statement continued. “As part of our ongoing discussions, we have asked Departments of Correction nationwide to sign a Memorandum of Understanding, which allow us to disclose returns and return information of inmates who the IRS determined may have filed or facilitated the filing of a false or fraudulent return. We disagree with TIGTA’s description of how the IRS uses prisoner information in identifying accounts, processing returns and responding to taxpayer correspondence. Additional details are found in the IRS management response in the TIGTA report.”
