Two Prisoners Responsible for $1.1 Billion in Fraudulent Tax Refunds, Report Finds

By Elizabeth Harrington | January 18, 2013 | 2:10 PM EST

(AP Photo)

( – The Internal Revenue Service (IRS) prevented $2.1 billion in fraudulent tax refunds filed by prisoners in 2012, largely thanks to stopping two inmates from attempting to collect $1.1 billion from Uncle Sam.

“Refund fraud committed by prisoners remains a significant problem for tax administration,” stated a report by the Treasury Inspector General for the Tax Administration. The report – made public on Thursday – states that in 2012 the IRS uncovered more than 170,000 fraudulent tax returns filed by prisoners.

The Accounts Management Taxpayer Assurance Program reported that from Oct. 1, 2011 to June 30, 2012, there were 173,106 fraudulent returns detected from inmates. Of those, 156,482 were stopped, preventing prisoners from receiving $2.1 billion in fraudulent payments.

In a footnote to the report, however, it states that more than half of the fraud came from only two inmates: “The amount of refunds detected and stopped in Fiscal Year 2012 includes two prisoner tax returns that totaled $1.1 billion in refunds.” 

The IRS said tax filing fraud among prisoners between 2004 and 2010 had increased by a staggering 405 percent. For full calendar year 2004, there were only 18,000 fraudulent returns, but by 2010, the number had risen to 91,000. 

Though the IRS prevented $722 million in fraudulent tax refunds to prisoners during calendar year 2010, the agency still released more than $35 million, the report said. “To combat this growing problem, the IRS compiles a list of prisoners (Prisoner File) from the Federal Bureau of Prisons and State Departments of Corrections,” the report states. 

However, the inspector general (IG) also found significant inaccuracies within the Prisoner File.

For instance, the file includes prisoners that were reported under institutions that are closed; numerous prisons reported only one prisoner each; and “not all prisons on the Institution File reported prisoners.”

Furthermore, of the 2.8 million records in the 2012 Prisoner File, 240,000, or nine percent, did not match information provided by the Social Security Administration.

“Most of these issues are beyond the control of the IRS,” the report explains. “The IRS has to rely on information provided by the prisons to identify prisoner-filed tax returns, and the IRS does not have the authority to disclose information to the prisons related to prisoner-filed fraudulent tax returns or prisoner identity issues.”

The IG recommended that Congress pass legislation to permanently allow the IRS to share data with prisons in order to make the Prison File more accurate to prevent fraud.