After prodding by a group of senators and an embarrassing report by the Treasury Inspector General for Tax Administration, the Internal Revenue Service has signed an agreement with the Bureau of Prisons to end fraudulent tax returns filed by prisoners.

Senators Charles E. Schumer, D-N.Y., Amy Klobuchar, D-Minn., Bill Nelson, D-Fla., and Sherrod Brown, D-Ohio, announced the agreement Wednesday. The senators had urged the IRS and the Bureau of Prisons last month to share information to curb the fraudulent filing of tax returns by incarcerated prisoners that has cost American taxpayers $123 million since 2004, according to the TIGTA report (see Senators Press IRS .to Stop Prisoner Tax Fraud).

The memorandum of understanding between the IRS and the BOP will end a years-long impasse between the two agencies and will save taxpayers significant money in the future. The senators expressed their appreciation for the agencies responding quickly to their request. The agreement covers federal prisons and paves the way for similar agreements to be signed between the IRS and prison systems in individual states.

“Last month, we made it clear to the IRS and the Bureau of Prisons that the impasse needed to end, and today it’s over,” Schumer said. “This agreement means that prisoners will no longer be able to bilk taxpayers out of millions of dollars. I appreciate the quick response on the part of the IRS and BOP.”

A TIGTA report in January found that prisoners in both federal and state penitentiaries are filing fraudulent refund claims from their jail cells without penalty due in part to an impasse between the BOP and IRS (see IRS Has Problems Identifying Prisoner Tax Fraud). The agencies had been at loggerheads over information sharing and were failing to take proper enforcement action.

In January, Schumer and his colleagues publicly urged the IRS and the BOP to end their standoff and finally begin sharing information so that the agencies could better respond to federal prisoners filing fraudulent returns. At the time, they noted that despite the agencies being given the authority by Congress in 2008 to share information to rein in the practice, little had been done and the cost of the fraud at federal and state prisons has doubled over the last six years.

The scams being executed by prisoners are twofold. In federal prisons, prisoners are filing fraudulent tax returns with fake names and Social Security numbers from their jail cells and have refund checks sent to addresses where third parties then deposit the refund checks. In many state prisons, prisoners are filing false returns, under their own names, from prison cells.

Congress gave the IRS the authority to turn over tax information to prison officials to identify suspicious behavior and root out fraudulent activity, but the BOP had declined to take enforcement action, such as restricting privileges, while being prohibited from sharing information with the Department of Justice should prisoners litigate. The BOP claimed that by prohibiting against disclosing information outside of the BOP, they couldn’t provide information needed for effective legal counsel to their staff in the event of litigation. The IRS would not share tax information with prison officials if they intended to provide it to persons outside of the BOP.

The IRS reported the number of fraudulent tax returns filed by federal and state prisoners in the United States more than doubled from 18,103 in 2004 to 44,944 in 2009. During that same time period, fraudulent claims rose from $68.1 million to $295.1 million. 

While many of these fraudulent claims were uncovered by the IRS Criminal Investigation unit, the number of fraudulent refund claims issued over the last six years has more than doubled from $13.4 million to $39.1 million. In total, from 2004-2009, up to $123 million in fraudulent claims have been paid out to individuals incarcerated in federal and state prisons.

Just this past March, a prisoner in an upstate New York jail was found guilty of having used the names and Social Security numbers of other individuals to file 21 different tax returns that claimed refunds of over $15,000. The prisoner filed the paperwork from prison and had visitors submit them on his behalf and refunded to phony addresses.

In their January letter to both the IRS and the BOP, the members of Congress noted that under the Inmate Tax Fraud Prevention Act of 2008, the IRS was given the authority to release tax information on incarcerated individuals to corrections officials. Despite this authority, the BOP was concerned about the risk of litigation.

The senators called on both the BOP and the IRS to use the authority granted to them by Congress to immediately begin sharing information so that prison officials can root out fraud occurring in federal penitentiaries. The IRS will now begin working with state prisons to share information with state prisons.

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