Insight News

Feb 09th

Ending tax return fraud in prisons

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United States Senator Amy Klobuchar (D-MN) after pushing for reform with a group of senators, the Federal Bureau of Prisons (BOP) and Internal Revenue Service (IRS) have signed an agreement that will help end the fraudulent filing of tax returns by incarcerated prisoners that has cost American taxpayers $123 million since 2004. The Memorandum of Understanding between the IRS and the BOP will end the years-long impasse between the two agencies.

“This agreement means that we can cut through government red tape and stop felons from scamming the system,” Klobuchar said. “This can save taxpayers millions of dollars and ensure that the IRS and Bureau of Prisons are cooperating as they should.”

Klobuchar joined with Senators Chuck Schumer (D-NY), Bill Nelson (D-FL) and Sherrod Brown (D-OH) to fix the problem after a Treasury Department Inspector General Report in January found that prisoners in both federal and state penitentiaries are filing fraudulent refund claims from their jail cells without penalty due to an impasse between the BOP and IRS. Citing false privacy concerns for prisoners, the agencies had been at odds over information sharing and were failing to take proper enforcement action.

In January, the senators publicly urged the IRS and BOP to end the standoff and finally begin sharing information so that the agencies could better respond to prisoners filing fraudulent returns. At the time, they noted that although Congress had given the agencies the authority to share information in 2008, little had been done and the cost of the fraud has doubled over the last six years.

The scams being executed by prisoners are twofold. In many cases, prisoners are filing false returns, under their own names, from prison cells. In other cases, the prisoners file 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.

Although Congress gave the IRS the authority to turn over tax information to prison officials in order to identify suspicious behavior and root out fraudulent activity, the BOP, citing privacy concerns, had declined to take enforcement action, such as restricting privileges, without first alerting prisoners and their counsel to the IRS information. The BOP claimed that by not disclosing the information to prisoners that had been provided by the IRS, it couldn’t take enforcement action – such as restricted visitation, use of the library, or access to email – because it would leave itself open to possible litigation. The IRS would not share tax information to prison officials if they intend to provide it to prisoners.

The IRS reported that the number of fraudulent tax returns filed by prisoners in the United States more than doubled from 18,103 in 2004 to 44,944 in 2009. The IRS reported that, during the same time period, the cost of 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 refunds issued over the last six years has more than doubled from $13.4 million to $39.1 million. In total, from 2004 to 2009, up to $123 million in fraudulent claims have been paid out to individuals incarcerated in the United States.

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’s fear of litigation for not disclosing to prisoners impending enforcement actions has hampered enforcement. Even though federal law prohibits the BOP from sharing tax information with the prisoner, the agency had remained hesitant to cooperate with the IRS.

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

The agreement between the IRS and BOP will ensure that prisoners will be hard pressed to file fraudulent tax returns and bilk taxpayers out of millions of dollars.


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