Carnival of Personal Finance #176
W&M hearing on the economy

Catching tax cheats in prison

When it comes to tax fraud, federal prisons apparently are branch offices.

The IRS estimates that around $375 million is lost each year to refund fraud. And part of that total comes from behind bars.

Between 7.5  percent to 15 percent of all refund tax fraud is being committed by prison inmates. And, says the IRS, the problem is growing, with prisoners devising elaborate schemes to receive refunds by fraudulently reporting earnings or claiming false eligibility for tax credits.

The IRS is hopeful that trend will soon slow.

Thanks to a newly enacted law, the Secretary of the Treasury can now disclose certain prisoner tax return information to prison officials.

How the Big House schemes work: Prison-based tax fraud usually involves a group of inmates. Using the name of one of the conspirators and employment identification numbers obtained from outside sources, the prisoners file fraudulent tax returns.

Criminal behind bars The fraudulent tax returns are smuggled out of the prison during visitation periods and mailed. The illegally created refunds then are typically sent to direct deposit bank accounts the conspirators established. Once the refunds are received, the money is smuggled back into the prison system, again via visitors.

The ill-gotten tax gains are most often used, say federal officials, to perpetuate the drug trade within the prisons.

The IRS has some procedures meant to detect and stop tax fraud by prison inmates, including maintaining a database of individuals who have been in prison within the last two-and-a-half years. According to 2004 tax year data, prisoners in that database filed 455,097 returns seeking $758 million in refunds.

The IRS identified 18,159 (4 percent) of these returns as fraudulent, but only stopped 14,033 (77 percent) of the refunds, worth $53 million, from being issued.

The Treasury Inspector General for Tax Administration also issued a report in 2005 on the prevalence then of this crime.

How the new law will help: The IRS is hoping that tax code changes will help tax investigators nab that additional 23 percent of fraudulent prison filers.

With the enactment of the Inmate Tax Fraud Prevention Act of 2008, signed by Dubya on Oct. 15, tax code privacy provisions were modified to allow Treasury officials to now share with prison officials the tax return information of inmates suspected of committing tax fraud.

Specifically, the IRS can disclose to the head of the Federal Bureau of Prisons any return information regarding individuals incarcerated in a federal prison who the IRS has determined may have filed, or assisted in the filing of, a false return.

Another tax criminal's prison limits: A different kind of fraud that an inmate wanted to continue practicing from behind bars also was recently halted.

A federal judge has permanently barred convicted tax protester and author Irwin Schiff from preparing tax returns and marketing his anti-tax products from behind bars or even after he completes his prison term.

Senior U.S. District Court Judge Lloyd George in Las Vegas earlier this month told Schiff, who's serving 13 years in federal prison, that he "cannot promote tax fraud schemes from within prison or when [he and a co-defendant] are released."

Schiff, 80, was convicted in October 2005 of conspiracy, tax evasion and tax fraud.

Comments

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Zelda

I have no problem with the IRS catching tax cheats, in prison or out. But the suggestion by the last poster that prisoners never receive a tax refund, when they're entitled to one legitimately, is off base. Prisoners already have their prison accounts garnished for restitution and other court fees. But I file my taxes jointly with my incarcerated husband - I shouldn't have to have our refund used to pay for his incarceration when I already pay plenty of taxes that go to pay for the federal prisons and the refund is needed for the needs of our child.

taxrascal

I guess people in prison have a lot of time to come up with this kind of scheme. Apparently the mackerel trade (http://online.wsj.com/article/SB122290720439096481.html?mod=article-outset-box) isn't as lucrative as it used to be.

Jan Dillaha

If you are incarcerated in a prison at any time during the tax year your ssn is flagged. Just as we keep dependents from being reported on more than one tax return we lock out those ssns for those serving in prison.

Any refund that these prisoners receive would be considered first for restitution and reimbursement for the cost of their incarceration. It would seem that the motivation to file a fraudulent return would be severely diminished.

The IRS should have expedited prosecution for incarcerated taxpayers who file fraudulent returns.

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