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The Resource Center Identity Theft & Protection | post

Report Criticizes How the IRS Is Maintaining Its “Prisoner File”

by Joe Mason on

Who knew the Internal Revenue Service has a "Prisoner File," let alone that the Agency and its "partners" — state and federal correction systems and individual institutions — would seem to be doing a less than perfect job of maintaining it. The Treasury's inspector general for tax administration does know the IRS has this file, and in a recently released report he takes the IRS to task for the job it's doing with the file.

Why should we care? Because it seems that many of this nation's incarcerated persons have developed a hobby — filing false tax returns using names/Social Security numbers obtained through identity theft.

It appears that some inmates scour obituaries, looking for people's identities to steal. Others comb online court records to identify businesses that have filed for bankruptcy and file returns that claim they worked there, using the bankruptcy as an excuse for why the company didn't send them a W-2 form. Some simply purchase stolen identities and Social Security numbers online through black market websites.

In many prisons these days, inmates are given wide latitude in computer use. This ease of computer use gives them the ability to obtain false identities and then to electronically file returns — in some cases many false returns. Filing electronically, the inmates can have refunds deposited into the bank accounts on the outside.

The Inspector General's report contains some disheartening statistics. "The number of fraudulent tax returns filed by prisoners increased from more than 18,000 tax returns in Calendar Year 2004 to more than 91,000 tax returns in Calendar Year 2010. The refunds claimed on these returns increased from $68 million to $757 million."

Of this $757 million that was sought, "the IRS prevented the issuance of $722 million in fraudulent tax refunds during Calendar Year 2010, but it released more than $35 million."

Government statistics tend to lag a bit. Somewhat incomplete data shows that prisoner filed phony tax returns seems to be a major growth industry. For Fiscal Year 2012, through June 30, 2012, more than 170,000 fraudulent tax returns from prisoners were detected and the IRS prevented the issuing of $2.1 billion in fraudulent refunds. How much still went out the door - so to speak - has not yet been determined.

(The $2.2 billion figure is a bit misleading because two unusually optimistic and industrious inmates, with a lot of time on their hands, tried to claim $1.1 billion themselves).

"Refund fraud committed by prisoners remains a significant problem for tax administration," said J. Russell George, the Treasury inspector general for tax administration, in a bit of an understatement.

This is what the Prisoner File attempts to combat. The IRS compiles a list of prisoners, and prisons, based on information provided by the Federal Bureau of Prisons and from the 50 State Departments of Corrections. The 2012 Prisoner File consists of 2.8 million records.

The inspector general's report is highly redacted with sections and pages blocked out so as not to divulge information that might be of use to identity thieves. So it is difficult to know exactly what information is missing or incorrect in the File. But the IG says his office's audit found closed prisons and populations still listed while newly opened facilities were not yet listed.

This whole area of inmate identity theft with respect to phony tax returns is complicated by the fact that by law the IRS is limited to the specific information it can share with corrections officials. New laws are needed. Then too, currently incarcerated prisoners may have legitimate reasons to file tax returns and get refunds, especially if they are newly incarcerated or have investment income. Their returns are closed audited.

So this is not as simple a problem to solve as it might seem. But it must be solved soon because the Treasury continues to bleed money from it.

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