Audit: More work needed to keep refunds from prisoners

By Bernie Becker - 01/17/13 04:54 PM ET

The IRS may have boosted its efforts to rein in prisoner tax fraud, but problems tracking prisoner information is making their work more difficult, a new federal audit has found.

The Treasury Department’s inspector general for tax administration found that the number of false tax returns from prisoners increased fivefold from 2004 to 2010, from more than 18,000 cases to over 91,000 cases. The amount of refunds also zoomed up, from some $68 million to $757 million.

In recent years, the IRS has successfully stopped a greater percentage of false refunds from shipped out. But the inspector general also found holes in the IRS’s prisoner file, which the agency uses to combat fraudulent returns.

Those gaps, including incomplete records and missing inmates, have limited the agency’s effectiveness in battling prisoner return fraud, the inspector general said.

“While many of the problems our auditors found are beyond the control of the IRS, the IRS must take steps to improve its validation and verification processes,” Russell George, the inspector general, said in a statement.

The agency’s 2012 prisoner file had roughly 2.8 million records, with about four out of five matching files at the Social Security Administration. But around a half million records were either missing key information or did not match the SSA’s records.

IRS officials also cannot discuss any inconsistencies with prison officials once they find out that their prisoner file and SSA records don’t match up. A 2008 law that allowed the agency to disclose a prisoner’s tax information to federal or state authorities if the prisoner filed a false return expired at the end of 2011.

With all that in mind, the tax administration inspector general called on Congress to pass legislation that would give the IRS permanent authority to share information on prisoners that file false returns, and recommended that the IRS boost its oversight of its prisoner file.

In its response, the IRS said that keeping its prisoner file up-to-date was made more difficult by the sheer number of jurisdictions involved in finding and verifying data.

The IRS also issued, on a percentage basis, far fewer fraudulent refunds in 2010. That year, the IRS issued $35.2 million in false refunds, out of a total of $757.6 million in claimed refunds – meaning around 4.6 percent of the claimed fraudulent refunds were issued.

But the year before, the IRS had issued $39.1 million out of a total of $295.1 million in claims – a 13.2 percent clip. And in 2004, the IRS issued about 20 percent of the total refunds claimed.