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Treasury Department Finds Prisoners’ Fraudulent Tax Returns Taxing
Despite passage of the Inmate Tax Fraud Prevention Act of 2008, the Internal Revenue Service has been unable to curb alleged income tax fraud by prisoners, according to a report released by the Inspector General of the U.S. Department of the Treasury.
The report, dated December 29, 2010, found “significant problems still exist with internal revenue service efforts to identify prisoner tax refund fraud.” The report claims that fraud is “increasing at a significant rate,” and the number of false tax returns soared from 18,103 in 2003 to 44,944 in 2009 while fraudulent refunds in that same time period increased from $13.4 million to $39.1 million. Not addressed by the report is the number of fraudulent tax refunds claimed by non-prisoners; i.e., members of the general public.
The Inmate Tax Fraud Prevention Act “restricts the use of data by the Federal Bureau of Prisons to facilitate only administrative actions against the [prisoner] ... [including] revocation of privileges such as canteen privileges, outside visits, etc....” The Secretary of the Treasury is also obligated to “provide an annual report to Congress on the filing of false or fraudulent tax returns by Federal and State prisoners.” According to the Inspector General’s report, “required agreements have not been completed to allow the Internal Revenue Service to disclose information to prison officials.”
Before data can be shared, the IRS must draft a Memorandum of Understanding with the Federal Bureau of Prisons and each state that outlines “how the tax return information will be received, secured and used by the Bureau and the State departments of corrections.” There have been unexplained delays in developing such memoranda and no data was being shared as of the date of the report. The Treasury Department is seeking an extension of the Inmate Tax Fraud Prevention Act, even though two years have passed since it went into effect.
The Treasury Department also recommended that the IRS’s Wage and Investment Division revise its annual report to provide Congress with a complete assessment of potential prisoner tax fraud. Additionally, it was suggested that all tax returns filed by prisoners be processed through the Electronic Fraud Detection System, and that the IRS revise its filters to validate the wages and withholding data associated with prisoners who have been incarcerated for at least a year and file tax returns claiming a refund.
The Treasury Department was critical of the IRS screening process, stating that expanded access to wage and withholding information could improve the identification of fraudulent tax returns, and noting that of the 287,918 tax returns filed by prisoners, 253,929 were not selected for screening. Of the tax returns that were not screened, 48,887 had no wage information reported to the IRS by employers.
According to U.S. Senator Chuck Grassley, ranking member of the Senate Finance Committee, “more than two years ago, Congress gave the IRS ... authority to share tax information with the Federal Bureau of Prisons. The IRS and the Federal Bureau of Prisons still don’t have an agreement in place to share information. Meanwhile, the number of inmates’ false returns and refunds continue to rise. This signals that prisoner tax fraud is a low priority for the federal government ... while they wait, taxpayers are picking up a growing tab for prisoner tax fraud.” According to the Inspector General report, prisoners received $123 million in refunds as a result of fraudulent tax returns from 2004 to 2009.
“We have the ability to put an end to this fraud and save taxpayers millions of dollars, but government bureaucracy has gotten in the way,” stated U.S. Senator Amy Klobuchar. “It’s time for the IRS and the Bureau of Prisons to work together to stop felons from scamming the system.”
The IRS disagreed with the assertion that it was not trying to combat the alleged tax fraud, noting that over 80% of fraudulent refunds sought by prisoners were prevented. The Treasury Department also mentioned another factor: not all prisoner tax returns are fraudulent. As stated in the report, “There are numerous ways a prisoner could ... earn income while incarcerated.” Some prison systems pay minimum wage to prisoners employed in industry programs, which results in income higher than the minimum filing requirement. Also, many “white collar” prisoners continue to have income from investments and business operations outside of prison. “Depending on the amount of these earnings, these prisoners may also be required to file a tax return and may be entitled to a tax refund, which could be significant,” the report noted.
Fraudulent tax returns filed by prisoners has been a long-standing problem. [See, e.g.: PLN, May 2007, p.22]. Additionally, PLN reported on a June 2010 Treasury Department study that found prisoners had claimed $9.1 million in fraudulent home buyer credits. [See: PLN, Feb. 2011, p.18]. However, that study – and the December 2010 Inspector General report on tax fraud – fail to emphasize that a number of prisoners and their outside accomplices have been prosecuted for filing false tax returns.
For example, most recently, New Jersey prisoner Jerry Julian, 47, ran a tax fraud scheme while serving time at the Riverfront State Prison, helping other prisoners file over 110 tax refund requests totaling around $215,000. He pleaded guilty to a federal tax fraud charge on June 27, 2011 and is awaiting sentencing.
Also, Barbara J. Singletary, 62, was indicted in federal district court in Illinois on June 23, 2011 for helping her son, Michael S. Chaney, incarcerated at FCI Greenville, in a tax fraud scam. She had mailed blank tax forms to Chaney, then sent completed fraudulent tax returns, including some in her own name, to revenue agencies in 11 states. She was charged with conspiracy to commit mail fraud and money laundering.
Sources: “Significant Problems Still Exist with Internal Revenue Service Efforts to Identify Prisoner Tax Refund Fraud” (Treasury Inspector General for Tax Administration, Ref. No. 2011-40-009), www.accountingtoday.com, Wall Street Journal, www.carmitimes.com, www.newjerseynewsroom.com
The report, dated December 29, 2010, found “significant problems still exist with internal revenue service efforts to identify prisoner tax refund fraud.” The report claims that fraud is “increasing at a significant rate,” and the number of false tax returns soared from 18,103 in 2003 to 44,944 in 2009 while fraudulent refunds in that same time period increased from $13.4 million to $39.1 million. Not addressed by the report is the number of fraudulent tax refunds claimed by non-prisoners; i.e., members of the general public.
The Inmate Tax Fraud Prevention Act “restricts the use of data by the Federal Bureau of Prisons to facilitate only administrative actions against the [prisoner] ... [including] revocation of privileges such as canteen privileges, outside visits, etc....” The Secretary of the Treasury is also obligated to “provide an annual report to Congress on the filing of false or fraudulent tax returns by Federal and State prisoners.” According to the Inspector General’s report, “required agreements have not been completed to allow the Internal Revenue Service to disclose information to prison officials.”
Before data can be shared, the IRS must draft a Memorandum of Understanding with the Federal Bureau of Prisons and each state that outlines “how the tax return information will be received, secured and used by the Bureau and the State departments of corrections.” There have been unexplained delays in developing such memoranda and no data was being shared as of the date of the report. The Treasury Department is seeking an extension of the Inmate Tax Fraud Prevention Act, even though two years have passed since it went into effect.
The Treasury Department also recommended that the IRS’s Wage and Investment Division revise its annual report to provide Congress with a complete assessment of potential prisoner tax fraud. Additionally, it was suggested that all tax returns filed by prisoners be processed through the Electronic Fraud Detection System, and that the IRS revise its filters to validate the wages and withholding data associated with prisoners who have been incarcerated for at least a year and file tax returns claiming a refund.
The Treasury Department was critical of the IRS screening process, stating that expanded access to wage and withholding information could improve the identification of fraudulent tax returns, and noting that of the 287,918 tax returns filed by prisoners, 253,929 were not selected for screening. Of the tax returns that were not screened, 48,887 had no wage information reported to the IRS by employers.
According to U.S. Senator Chuck Grassley, ranking member of the Senate Finance Committee, “more than two years ago, Congress gave the IRS ... authority to share tax information with the Federal Bureau of Prisons. The IRS and the Federal Bureau of Prisons still don’t have an agreement in place to share information. Meanwhile, the number of inmates’ false returns and refunds continue to rise. This signals that prisoner tax fraud is a low priority for the federal government ... while they wait, taxpayers are picking up a growing tab for prisoner tax fraud.” According to the Inspector General report, prisoners received $123 million in refunds as a result of fraudulent tax returns from 2004 to 2009.
“We have the ability to put an end to this fraud and save taxpayers millions of dollars, but government bureaucracy has gotten in the way,” stated U.S. Senator Amy Klobuchar. “It’s time for the IRS and the Bureau of Prisons to work together to stop felons from scamming the system.”
The IRS disagreed with the assertion that it was not trying to combat the alleged tax fraud, noting that over 80% of fraudulent refunds sought by prisoners were prevented. The Treasury Department also mentioned another factor: not all prisoner tax returns are fraudulent. As stated in the report, “There are numerous ways a prisoner could ... earn income while incarcerated.” Some prison systems pay minimum wage to prisoners employed in industry programs, which results in income higher than the minimum filing requirement. Also, many “white collar” prisoners continue to have income from investments and business operations outside of prison. “Depending on the amount of these earnings, these prisoners may also be required to file a tax return and may be entitled to a tax refund, which could be significant,” the report noted.
Fraudulent tax returns filed by prisoners has been a long-standing problem. [See, e.g.: PLN, May 2007, p.22]. Additionally, PLN reported on a June 2010 Treasury Department study that found prisoners had claimed $9.1 million in fraudulent home buyer credits. [See: PLN, Feb. 2011, p.18]. However, that study – and the December 2010 Inspector General report on tax fraud – fail to emphasize that a number of prisoners and their outside accomplices have been prosecuted for filing false tax returns.
For example, most recently, New Jersey prisoner Jerry Julian, 47, ran a tax fraud scheme while serving time at the Riverfront State Prison, helping other prisoners file over 110 tax refund requests totaling around $215,000. He pleaded guilty to a federal tax fraud charge on June 27, 2011 and is awaiting sentencing.
Also, Barbara J. Singletary, 62, was indicted in federal district court in Illinois on June 23, 2011 for helping her son, Michael S. Chaney, incarcerated at FCI Greenville, in a tax fraud scam. She had mailed blank tax forms to Chaney, then sent completed fraudulent tax returns, including some in her own name, to revenue agencies in 11 states. She was charged with conspiracy to commit mail fraud and money laundering.
Sources: “Significant Problems Still Exist with Internal Revenue Service Efforts to Identify Prisoner Tax Refund Fraud” (Treasury Inspector General for Tax Administration, Ref. No. 2011-40-009), www.accountingtoday.com, Wall Street Journal, www.carmitimes.com, www.newjerseynewsroom.com
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