​​Fraud Behind Bars
Dubious tax refunds are paying off for U.S. prisoners, audit says.​

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​Fraudulent tax refund claims by U.S. prison inmates topped US$1 billion in 2012, a six-fold increase since 2007, according to a report by the Treasury Inspector General for Tax Administration (TIGTA). There were more than 137,000 fraudulent claims in 2012, up from 37,000 in 2007. The report faults the U.S. Internal Revenue Service (IRS) for failing to take necessary steps to curb fr​audulent claims. The IRS blocked US$936 million of fraudulent claims, but paid out more than US$64 million. One North Carolina inmate says he has defrauded the federal government of nearly US$4 million by using real names and Social Security numbers, the Fiscal Times reports.​​​​

Lessons Learned

The scope of the prisoner tax fraud problem is surprisingly large. According to the U.S. Bureau of Justice Statistics, in 2011, 2.26 million adults were incarcerated in federal prisons, state prisons, and county jails — nearly 1 percent of U.S. adults. Combined with an additional 4.81 million adults who were on probation or on parole, that totals more than 7 million adults, or about 2.9 percent of the U.S. population.

In its 2014 audit of IRS activities, the TIGTA observes that refund fraud associated with prisoner Social Security numbers is a growing problem for tax administration. Although the IRS is making some progress in implementing anti-fraud measures to counter the threat of crimes perpetrated by prisoners, the inspector general says more can be done. The IRS continues to insist it is doing all it can. Based on my review of the TIGTA's audit and the IRS management's response, of the six recommendations the inspector general makes, there are three that the IRS should address more proactively. All three are issues that auditors will see arise in assessing audit issues generally found in diverse organizations.

  • Required annual prisoner fraud reports to Congress are not timely. Congress (as legislators and overseers) and the public (as taxpayers) should be informed as soon as possible about the state of play of this fraud issue, and delays in reporting may be affecting the identification and implementation of improvements to fraud detection, including additional legislative initiatives.

  • IRS annual reports do not adequately address the full extent of fraudulent tax return filings by prisoners. The IRS' annual report to Congress only includes false and fraudulent tax returns filed using a prisoner's Social Security number. The TIGTA's audit report includes clear examples the IRS could use to better determine the possible extent of the filing of false or fraudulent returns by federal and state prisoners that is not included in its annual reports. For example, the IRS apparently is not able to prevent the issuance of a refund for fraudulent returns that used a direct deposit account. The inspector general found that there were 16,342 unique direct deposit accounts used on 16,449 tax returns. Using these account numbers, the inspector general identified 1,777 accounts that also were used on another 47,321 tax returns, and the tax refunds claimed on these tax returns totaled more than US$102 million.

    While one cannot conclude this entire sum is based on fraudulent activity, it may indicate that one or more prisoners may be perpetrating an identity-theft fraud scheme — hence its relevance to include in statutory reporting. The kind of profiling and matching process the inspector general is advocating is already in place to deal with many categories of noncompliant taxpayers, both in the United States and internationally. Examples include nonfilers, industries and businesses that are high risk for under-reporting income, and those operating within the "underground economy."

  • ​​​The IRS does not consistently and thoroughly assign a prisoner indicator (or unique identifier) for all prisoners. ​If this unique identifier is not assigned, it means that the tax return will not be subjected to the IRS' specialized prisoner fraud checks, according to the TIGTA's audit. But this is the kind of measure that is regularly adopted by governments to enable them to identify and interact with clients of a wide range of programs and services, including for child benefits and others. It is not about presuming that the identified population is automatically engaging in illegal behavior; it is about ensuring that the right clients are provided with the services and benefits they deserve while preserving the integrity of compliance with the program/service requirements. 

    The IRS management response that essentially defended its limited scope of prisoner indicators based on "systemic limitations," "programming issues," or that it is unnecessary in those cases where no refund is being sought — which does not mean that the right amount of tax is being paid — does not seem entirely defensible in light of the IRS' mandates and resources. Further, the IRS response does not seem to identify privacy or personal information protection as a constraint to taking further actions in this area.​​​

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