Prisoners get millions from IRS in bogus refund claims, watchdog finds

May 13, 2013: A woman walks out of the Internal Revenue Service building in New York. (AP)

Hundreds of thousands of prisoners are filing phony tax refund claims and the IRS is not doing enough to quash the problem, according to a watchdog report.

The Treasury Inspector General for Tax Administration (TIGTA) said in its report Tuesday that refund fraud associated with prisoner Social Security numbers is a “significant problem” for the tax agency that is only getting worse over time.

According to the report, more than 137,000 phony tax returns were filed in 2012 using a prisoner’s Social Security number to the tune of $1 billion. While many of the fake refunds were flagged and prevented by the agency, the IRS issued $70 million in bogus refunds.

This was a significant increase from 2007, when more than 37,000 fake tax returns were filed for amounts equaling $166 million.

“Tax refund fraud associated with prisoners remains a significant problem for tax administration,” the report said.

The watchdog conducted the review after previous reports showed that the IRS was not doing enough to identify and crack down on fraudulent prisoner tax refund claims. The review was aimed at determining if the agency was doing enough to correct the problem.

The watchdog determined that the IRS was not taking a number of steps to crack down on the fraud. For one, the report said the IRS has not shared the information about the fraudulent claims with state and federal prison authorities.

In addition, the watchdog found that the IRS was not providing consistent updates to Congress about the problem, as is required by the Inmate Tax Fraud Prevention Act of 2008.

“TIGTA also found that the required annual prisoner fraud reports to Congress are not timely and that the reports do not address all aspects of prisoner fraud,” the report said.

TIGTA made six recommendations to the IRS to remedy the problem, of which the agency agreed with four.

In response, a representative for the IRS said the agency is working to stop the problem of prisoner tax refund fraud.

“The IRS has continued to build on processes to detect and stop potentially fraudulent refund claims made by prisoners,” Debra Holland, the agency’s commissioner of its Wage and Investment Division, said.