WASHINGTON — Tax fraud appears to be a popular pastime in the nation's prisons, but the Internal Revenue Service is catching on.
The IRS detected more than 173,000 fraudulent tax returns from prison inmates last year, many of them using stolen identities and other false information in an attempt to get tax refunds. That's more than twice the number of fraudulent returns detected from inmates in 2010, according to a report Thursday by the Treasury Department's inspector general for tax administration.
In all, the IRS says it stopped inmates from illegally claiming $2.5 billion in tax refunds in the 2012 budget year. About $1.1 billion was claimed by just two inmates.
The report credits the IRS and prison officials with stepping up enforcement and sharing more information, but it says more can be done to stop tax fraud among inmates.
"Refund fraud committed by prisoners remains a significant problem for tax administration," said J. Russell George, the Treasury inspector general for tax administration.
The heavily redacted report contains few details about inmates' scams and no information about how two prisoners thought they could get the federal government to send them more than $1 billion. Tax information, even for inmates, is private by law, unless a person gets charged with a crime.
The IRS says it aggressively prosecutes tax fraud.
Over the years, investigators have found that crafty inmates will go to great lengths to try to steal identities or trick the IRS into sending them a refund they don't deserve, said IG spokeswoman Karen Kraushaar.
Some inmates scour obituaries, looking for people's identities to steal. Others use the identities of fellow inmates or even their own.
Some use their access to computers to file tax returns online. They can have refunds electronically deposited into the bank accounts of friends on the outside.
Some inmates have identified businesses that have filed for bankruptcy and claimed to work there, using the bankruptcy as an excuse for why the company didn't send them a W-2 form.
In 2010, the IG's office found that nearly 50,000 prison inmates claimed more than $130 million in tax refunds without providing any wage information to the IRS, according to a 2010 audit. That same year, the IG found that nearly 1,300 prison inmates had improperly received more than $9 million in homebuyer tax credits while they were locked up.
"Most taxpayers find e-filing to be quick and easy. Unfortunately, some bad guys have also found it a quick and easy way to commit fraud," Kraushaar said. "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."
Prison inmates may have legitimate reasons to file tax returns and get refunds, especially if they are newly incarcerated or have investment income. However, the IRS gives special scrutiny to returns from inmates, when the agency is able to identify them, said IRS spokeswoman Michelle Eldridge.
"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," Eldridge said. "The IRS is committed to enhancing its processes to even further minimize prisoner refund fraud. Still, as the report recognizes, our efforts are impacted by issues related to the accuracy of prisoner information we receive."
The IRS has been helped by several recent laws that require the agency and state and federal prison officials to share information about inmates. The agency now maintains a master file that is supposed to include information about every inmate in state or federal prison.
The new IG report, however, found discrepancies. For example, six closed prisons in Michigan and 10 closed prisons in North Carolina all reported having inmates last year, according to the report.
New federal reporting requirements went into effect last year for federal and state prisons, Eldridge said. "While this was a substantial step forward in refining and improving the accuracy of the prisoner file, there are still significant challenges in getting complete and consistent data from the multiple jurisdictions involved," she said.
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