Two Prison Inmates Claim $1.1 Billion In Fraudulent Tax Refunds

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Prison inmates fraudulently claimed $2.5 billion in tax refunds in 2012—more than double 2010’s prison-related tax fraud. Inmates filed taxes using false employment and housing information, as well as stolen identities. Fortunately, the IRS is finally catching on to prison tax schemes.

According to the US Treasury Department, more than 173,000 fraudulent tax returns were filed by prison inmates in 2012, and two inmates were able to file returns awarding $1.1 billion in fraudulent refunds—almost half of the $2.5 billion in fraudulent refunds claimed for the entire year.

“Refund fraud committed by prisoners remains a significant problem for tax administration,” said J. Russell George, the Treasury inspector general for tax administration in his Jan. 17 report.

Investigators have identified a variety of methods used by inmates to file fraudulent claims, including searching obituaries for identities to steal, stealing identities of fellow inmates, claiming to work for businesses that recently filed for bankruptcy, and claiming homebuyer tax credits while they were incarcerated. In 2010, the inspector general’s office found almost 50,000 inmates claimed more than $130,000 million in tax refunds without providing any wage information to the IRS. Additional computer access from the inside has amplified the problem.

Most taxpayers find e-filing to be quick and easy,” said inspector general spokesperson Karen Kraushaar. “Unfortunately, some bad guys have also found it a quick and easy way to commit fraud. To the IRS’s credit, our report found that they are doing a much better job of stopping such fraudsters in their tracks. But more needs to be done.”

Of course some inmates may have legitimate reasons to file a return, such as the recently-incarcerated reporting wages or reporting investment income. The IRS now gives extra scrutiny to any returns from inmates, however—if it can identify them. Several recent laws require the IRS and prison officials to share inmate information. The IRS administers a master file that is designed to include information on all inmates at state and federal prisons. But the new Treasury report found some issues with the database.

Six closed prisons in Michigan, for example, as well as 10 closed prisons in North Caroline, all reported inmates last year, according to the IRS database.