IRS cracks down on prisoner tax fraud and identity theft

Accounting

The Internal Revenue has been taking steps to identify and prevent tax refund fraud associated with the Social Security Numbers of the incarcerated, according to a new report.

The report, released Monday by the Treasury Inspector General for Tax Administration, found the IRS identified more than 4,500 fraudulent tax returns using a prisoner’s SSN in 2019, claiming refunds totaling over $14 million. The amounts could have been higher, but after a 2017 report from TIGTA, the IRS and other agencies at the federal and state level have been putting in place processes to stop tax refunds from being issued to prisoners and people who steal prisoners’ SSNs. One of them involves the Federal Bureau of Prisons and state departments of corrections complying with a requirement to provide the IRS with an annual list of all prisoners incarcerated within their prison system. TIGTA’s review did not identify any prisons that didn’t report their inmates to the IRS.

The report arrives as the IRS is in the midst of another extended tax season, while trying to deal with recent COVID-19 relief laws and three rounds of Economic Impact Payments that have added to the IRS’s responsibilities. At the same time, the IRS has to deal with the perennial problem of identity theft, including the exploitation of prisoners’ identities for filing fraudulent returns, often by their fellow inmates.

Internal Revenue Service headquarters in Washington, D.C.

Andrew Harrer/Bloomberg

“Preventing refund fraud associated with prisoners’ Social Security Numbers is a challenge for tax administration,” said the TIGTA report.

The IRS has improved its processes to make sure it identifies all paper-filed prisoner tax returns for screening and verification, according to the report. There was a brief time period when the IRS’s Return Review Program was shut down in January 2020, but no paper-filed tax returns from prisoners were processed during that time. The Return Review Program is an automated system that helps the IRS detect and prevent noncompliance and identity theft so it can reduce fraudulent tax refunds.

The IRS has also improved its verification of prisoner records received from federal prisons and state correctional facilities to make sure all the valid records are added to the IRS Prisoner File. But TIGTA said the IRS could do more to expand participation in the IRS’s Blue Bag Program, in which the IRS partners with the Federal Bureau of Prisons and state corrections departments to identify potentially fraudulent tax returns and refunds. The IRS hasn’t yet established processes to track Federal Bureau of Prisons’ and state corrections departments’ participation in the Blue Bag Program.

The IRS Prisoner File process could also be improved. In 2019, 906 prisoner returns bypassed the system’s selection for fraud analysis. TIGTA further analyzed the returns and found that eight of them reported income and withholding amounts that weren’t supported by third-party income documents. The people who filed the returns received potentially fraudulent refunds totaling more than $24,000.

Another automated program that needs further improvement is the Automated Questionable Credit Program. TIGTA found that 3,984 tax year 2018 refund tax returns that were filed using prisoners’ Social Security numbers and claiming refundable tax credits totaling $4.8 million erroneously bypassed the Automated Questionable Credit Program for review.

TIGTA made three recommendations in the report, suggesting for example that the IRS’s Wage and Investment Division should make sure that responses to the Blue Bag Program letter received from prison institutions are tracked to allow the IRS to identify and work with those prison institutions that do not respond or agree to participate in the program. The IRS agreed with all three recommendations and said it has already taken steps to properly track responses received to the Blue Bag Program letter, validate data quality, ensure quality checks, and update its internal procedures.

“The IRS has improved its verification of prisoner records received from federal prisons and state correctional facilities to ensure that all valid records are added to the Prisoner File,” wrote Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “To prevent the issuance of false or fraudulent refund claims, our processes use the Return Review Program (RRP) pre-refund filters to identify questionable returns filed using a prisoner’s Social Security Number. After finding a formatting error had corrupted some records in the Prisoner File, we strengthened our review processes to improve data reliability in the future. While 906 prisoner returns were affected by the corrupted records, only eight returns were found to claim income tax withholding that was not supported by third-party documents.”

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