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Fiscal cliff tax provision could help stem fraudulent refund claims by prisoners

January 23, 2013

Tax season is fraud season. And a large amount of illegal tax returns are being filed by people who are already in jail.

But a provision of the fiscal cliff tax law, officially known as the American Tax Relief Act of 2012, could help the Internal Revenue Service stop or at least slow down fake refund filings by inmates.

Last December, as Congress was fighting about ways to deal with expired and expiring tax laws, the Treasury Inspector General for Tax Administration (TIGTA) released a report on tax fraud by prisoners.

The tax watchdog office found that the amount of fraudulent tax returns filed by prisoners and caught by the IRS skyrocketed from just over 18,000 in 2004 to more than
91,000 tax returns in 2010.

The dollars that the felons tried to claim showed an equally impressive and distressing jump. The fake refund requests went from $68 million to nearly $758 million in that six-year span.

Fraudulent Tax Returns Filed by Prisoners
for Calendar Years 2004–2010

Fraudulent returns filed by prisoners 2004-2010
[3] Refunds Prevented and Refunds Issued may not total the Refunds Claimed
for Calendar
Years 2004 through 2010 because Refunds Claimed did not include adjustments
made during tax return processing in those years.
Click table for a larger view.

With those numbers, it’s no wonder that TIGTA found “refund fraud committed by prisoners remains a significant problem
for tax administration.”

The good news, for the IRS and us taxpayers who aren’t incarcerated, is that the tax agency stopped the vast majority of fraudulent refunds from
actually getting into the hands of prisoners.

The bad news is that $35 million still managed to make it to Graybar Hotel residents.

More recently, TIGTA found that through three-quarters of fiscal year 2012 (the end of June that year), prisoners had filed more than 170,000 fraud tax returns that were caught. That saved $2.1 billion from going to the criminals who were continuing their illegal tax activity from their cells.

Working with prison officials: TIGTA’s reason for the assessment was to determine the reliability of
the IRS Prisoner File. This is the data collected by the Federal Bureau of
Prisoners and State Departments of Corrections on
prisoners.

The IRS’ ability to stop illegally filed returns by prisoners depends on the accuracy and reliability
of the Prisoner File.

But the information trade wasn’t reciprocal when TIGTA did its study. At that time, the IRS doesn’t have the authority to
tell prison officials anything about the fraudulent tax
returns filed by prisoners.

When prison personnel can’t curtail tax abuse from the criminals’ end, said TIGTA, IRS efforts to identify fraudulent refunds on prisoner tax
returns is not fully effective.

TIGTA recommended that the IRS compare prison and prisoner files. The tax watchdog office also noted that legislation is needed to permanently authorize the IRS
to share data with the prisons.

A prior law gave the IRS authority to inform prison officials about prisoners who filed fraudulent tax returns, but the law expired. Legislation was subsequently introduced to give the IRS the authority to disclose prisoner tax return information to the Federal Bureau of Prisons and the State Departments of Corrections if the prisoner filed or helped in the filing of a fraudulent tax return. 

But the proposal didn’t go anywhere … until Jan. 1, 2013.

Share and share alike: Section 209 of ATRA enhances and makes permanent the previous prisoner tax fraud provision that allows
the IRS to disclose certain tax return information
to prison officials to curb tax fraud by inmates.

The measure was part of the tax extenders bill approved by the Senate Finance Committee and rolled into ATRA. The Committee report on the prisoner information exchange noted that “sharing information with prison officials will allow the
prison officials to take appropriate disciplinary and administrative
action to deter prisoners from filing false federal tax returns.”

In addition, the report pointed out that since “many state prisons are run on a contract basis, and the
IRS has identified a number of these prisons as sources of false
returns, the Committee believes that equal disclosure authority should
be afforded to such prison officials to address the matter.”

So in addition to stopping prisoner tax refund fraud, ATRA also could help ensure that Uncle Sam cut deals with more efficient private prison administrators.

And there’s another bonus.

Along with preventing prisoners from filing and sometimes collecting fraudulent refunds, the Senate Finance Committee preliminary estimates indicate that the permanent extension of the prisoner information sharing provision could raise $12 million over ten years.

You also might find these items of interest:

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TAX-SAVVY WAYS 
TO WRAP UP 2026

It’s over! With October’s extended filing deadline behind us, it is now time to focus on year-end moves to reduce your 2026 tax bill. 

You’ll find ways to do just that on the Tax Tips page (see the More Tax Posts drop-down menu at the top of the blog), as well as the separate tax tip pages for each month, notably October through December. If you’re on the Tax Tips page, you’ll find a monthly list at the end of this column. If you’re on another blog page, you can head straight to the October tips; at the bottom of that tips page you’ll find links to all the other 11 months’ collections of tax advice.

Not to spoil what you’ll find in that tax advice, but it does cover such things as tax deductions for charitable donations, investment moves that could reduce tax due, and ways to max out your tax-favored retirement savings. 

Finally, as the year winds down, things get hectic. There are lots of other things to occupy our time, like the much more fun upcoming holidays. But don’t lose sight of taxes, since timing is key. To be of use, most tax moves must be made by the end of the tax year. That’s Thursday, Dec. 31, which also is the last business day of the year. 

So that you don’t miss that final tax year deadline, also keep an eye on the countdown clock below. It will keep you on top of just how much time is left to make important, tax-saving moves. (Note: I’m in the Central Time Zone, so adjust accordingly for where you live.)

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