Significant Problems Still Exist With Internal Revenue Service Efforts to Identify Prisoner Tax Refund Fraud
December 29, 2010
Reference Number: 2011-40-009
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Redaction Legend:
2(a) = Law Enforcement Criteria
8 = Agency/Bureau’s Decision-Making Process
Phone
Number | 202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site |
http://www.treas.gov/tigta
HIGHLIGHTS
SIGNIFICANT PROBLEMS STILL EXIST WITH
INTERNAL REVENUE SERVICE EFFORTS TO IDENTIFY PRISONER TAX REFUND FRAUD
Highlights
Final
Report issued on December 29, 2010
Highlights of Reference
Number: 2011-40-009 to the Internal
Revenue Service Commissioner for the Wage and Investment Division.
IMPACT ON TAXPAYERS
Refund fraud committed by prisoners is increasing at
a significant rate. The number of
fraudulent prisoner tax returns identified by the Internal Revenue Service
(IRS) has more than doubled from 18,103 tax returns in Calendar Year 2004 to 44,944
tax returns in Calendar Year 2009.
Fraudulent refunds claimed rose from $68.1 million to $295.1 million
during the same period.
WHY TIGTA DID THE AUDIT
This
audit was initiated because the
Inmate Tax
Fraud Prevention Act of 2008 requires TIGTA to submit a report to Congress by December
31, 2010, on the implementation of the IRS authority to disclose prisoner tax
return information to the head of the Federal Bureau of Prisons and State Departments
of Corrections. The objective of this
review was to assess the IRS’s efforts to reduce prisoner fraud, including an
assessment of the IRS’s compliance with the Inmate Tax Fraud Prevention Act.
WHAT
TIGTA FOUND
TIGTA’s review identified that as of October 2010, the IRS had not
completed required agreements to allow the IRS to disclose prisoner tax return information
to prison officials. As a result, no
information has been disclosed to either the Federal Bureau of Prisons or State
Departments of Corrections.
In
addition, the Calendar Year 2009 Report to Congress on prisoner fraud is
incomplete. The report stated the
IRS identified 44,944 false/fraudulent prisoner tax returns during Calendar
Year 2009. However, the processes the IRS
uses to identify prisoner tax returns may result in the IRS understating the
amount of prisoner fraud.
Finally, our review of the process used by the Criminal
Investigation Division to compile the 2009 prisoner data file identified a lack
of managerial oversight to ensure the accuracy and reliability of this
file.
WHAT TIGTA RECOMMENDED
TIGTA recommended
that the IRS work with the Department of the Treasury to seek legislation to
extend the period of time the IRS has to disclose prisoner tax return data to
the Federal Bureau of Prisons and State prison officials. TIGTA also recommended that the Commissioner,
Wage and Investment Division:
· Revise the annual report to provide Congress with a complete assessment of potential prisoner fraud.
· Ensure all tax returns filed by prisoners are processed through the Electronic Fraud Detection System and receive a prisoner indicator.
· Revise prisoner filters to validate wages and withholding associated with prisoners incarcerated for a year who filed tax returns claiming a refund.
· Develop a process to assess the reliability (accuracy and completeness) of data received from Federal and State prisons.
The
IRS agreed with two of our five recommendations and partially agreed with two
recommendations. The IRS did not
indicate its agreement or disagreement with one recommendation.
December 29, 2010
MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: For Michael R. Phillips /s/ Alan R. Duncan
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Significant Problems Still Exist With Internal Revenue Service Efforts to Identify Prisoner Tax Refund Fraud (Audit # 201040010)
This report presents the results of our review of the Internal Revenue Service’s (IRS) efforts to reduce prisoner fraud including an assessment of the IRS’s compliance with the Inmate Tax Fraud Prevention Act of 2008.[1] The Inmate Tax Fraud Prevention Act of 2008 requires the Treasury Inspector General for Tax Administration to report on the IRS’s implementation of the Act no later than December 31, 2010. This audit was included in our Fiscal Year 2010 Annual Audit Plan and addresses the major management challenge of Erroneous Improper Credits and Payments.
IRS management responded that it agreed or partially agreed with our recommendations. However, the IRS response states that it does not agree with our conclusion that the Calendar Year 2009 Report to Congress is incomplete. Management acknowledges that not all prisoner tax returns meet the criteria for inclusion in the Electronic Fraud Detection System. As such, it asserts that these returns correctly did not receive a prisoner indicator.
As noted in our report, we agree some of the prisoner tax returns we identified did not meet the criteria for inclusion in the Electronic Fraud Detection System. However, it is our opinion that every tax return filed by a prisoner should be notated as such with a prisoner indicator without regard for whether or not it meets the Electronic Fraud Detection System criteria. Placing an indicator on each prisoner-filed tax return will alert all functions involved in the processing of tax returns, as well as those functions involved in assessing tax return fraud, so the prisoner status can be considered in all dealings with the tax return.
Management’s complete response to the draft report is
included as Appendix VII.
Copies of
this report are also being sent to the IRS managers affected by the report
recommendations. Please contact me at
(202) 622-6510 if you have questions or Michael E. McKenney, Assistant
Inspector General for Audit (Returns Processing and Account Services), at (202)
622-5916.
The Calendar
Year 2009 Report to Congress on Prisoner Fraud Is Incomplete
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
V – Internal Revenue Service Request for Prisoner Information
Appendix
VI – Calendar Year 2009 Report on False and Fraudulent Prisoner Tax Returns
Appendix
VII – Management’s Response to the Draft Report
Abbreviations
|
EFDS |
Electronic Fraud Detection System |
|
IRS |
Internal Revenue Service |
|
TY |
Tax Year |
|
SSN |
Social Security Number |
Refund fraud committed by prisoners is increasing at a significant rate. The number of fraudulent prisoner tax returns identified by the Internal Revenue Service (IRS) has more than doubled from Calendar Years 2004 to 2009. Figure 1 shows the number of identified false tax returns and the related refund information for Calendar Years 2004 through 2009.
Figure 1: False Prisoner Tax Returns – Calendar Years 2004 - 2009
|
Calendar
Year |
False
Tax Returns |
Refund
Claimed[2] (Millions) |
Refund
Prevented (Millions)
|
Refund
Issued (Millions)
|
|
2004 |
18,103 |
$68.1 |
$54.6 |
$13.4 |
|
2005 |
21,254 |
$80.4 |
$67.5 |
$12.8 |
|
2006* |
N/A |
N/A |
N/A |
N/A |
|
2007 |
37,447 |
$165.9 |
$136.6 |
$29.2 |
|
2008 |
47,898 |
$190.4 |
$162.1 |
$28.3 |
|
2009 |
44,944 |
$295.1 |
$256 |
$39.1 |
|
* Data were unavailable in Calendar Year 2006. |
||||
Source: IRS Criminal Investigation Division.
The Inmate Tax Fraud Prevention Act of 2008,[3] signed October 15, 2008, provides the IRS with the authority to disclose information on prisoners who have filed or facilitated the filing of a false tax return to the head of the Federal Bureau of Prisons. The Act restricts the use of the data by the Federal Bureau of Prisons to facilitate only administrative actions against an inmate.[4] The Act prevents the Federal Bureau of Prisons from sharing inmate tax return data with anyone who is not an officer or employee of the Federal Bureau of Prisons. Congress amended the Act in July 2010[5] to allow the IRS to share prisoner tax data with State Departments of Corrections.[6] Provisions included in the Act also require the Secretary of the Treasury to provide an annual report to Congress on the filing of false or fraudulent tax returns by Federal and State prisoners. The Treasury Inspector General for Tax Administration is required to submit a report to Congress by December 31, 2010, on the implementation of the authority to disclose prisoner tax return information. The Act expires on December 31, 2011.
The IRS coordinates with Federal and State prison officials annually to develop its Prisoner File
Each July, the IRS requests data for prisoners incarcerated *****2(a)*************** **********2(a)************ from the Federal Bureau of Prisons and State Departments of Corrections.[7] The Federal Bureau of Prisons and State Departments of Corrections are not required to provide these data. The IRS requests prisoner data through August 31st of the calendar year including the Social Security Number (SSN), name, date of birth, and incarceration and release dates for each prisoner. The IRS requests these data be provided electronically by September 15th of the calendar year. Once received from the various facilities, the IRS consolidates the data into one comprehensive prisoner file. The prisoner file is the cornerstone of the IRS’s efforts to prevent the issuance of fraudulent refunds to prisoners.
In May 2010, the IRS shifted responsibility for maintaining and assembling the prisoner file used to identify tax returns filed by prisoners from the Criminal Investigation Division to the Wage and Investment Division’s Pre-Refund Office. IRS management indicated the move would allow the IRS to leverage its data collection knowledge by aligning the collection of prisoner data with other third-party data collection and matching activities.
This review was performed at the IRS Headquarters in
Washington, D.C., in the Criminal Investigation Division and at the IRS Wage
and Investment Division Headquarters in Atlanta, Georgia, in the Electronic Tax
Administration and Refundable Credits function.
This review was conducted during the period April through October 2010. We conducted this performance audit in
accordance with generally accepted government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on
our audit objective. Detailed
information on our audit objective, scope, and methodology is presented in
Required Agreements Have Not Been Completed to Allow the Internal Revenue Service to Disclose Information to Prison Officials
Although legislation was passed in October 2008, as of October
2010, the IRS had not completed the necessary agreements to allow disclosure of
prisoner tax return information.
The law that provides the IRS with the authority to disclose prisoner tax information was passed in October 2008. However, as of October 2010, the IRS had not completed the necessary agreements to share prisoner information. As a result, no information has been disclosed to either the Federal Bureau of Prisons or State Departments of Corrections. Before the IRS can share prisoner tax data, the IRS must develop Memoranda of Understanding with the Federal Bureau of Prisons and each State that outline how the tax return information will be received, secured, and used by the Bureau and the State Departments of Corrections. The IRS’s inability to disclose information resulted from delays in developing required Memorandum of Understanding with the Federal Bureau of Prisons and State Departments of Corrections.
Discussions with the IRS and representatives from the Federal Bureau of Prisons indicate that progress on the Memorandum of Understanding was slowed by concerns about whether the Bureau could share data provided by the IRS with legal counsel in the event a prisoner should litigate actions taken by the Bureau. In addition, the Federal Bureau of Prisons had concerns as to whether it could disclose to the prisoner the reason the Bureau was taking adverse action. The Inmate Tax Fraud Prevention Act does not address whether tax return information can be disclosed to legal counsel and/or the prisoner. Subsequent to these concerns being raised, the IRS contacted the Department of Justice for a ruling on the ability to share prisoner tax data in these instances. The Department of Justice provided its opinion on the items in question to the IRS on July 27, 2010. *******************************8**************************************************************. Our discussions with representatives from the Federal Bureau of Prisons in late September 2010 indicate the Bureau was unaware the IRS had received an opinion resolving its concerns.
The following timeline shows that the IRS first met with the Federal Bureau of Prisons in November 2008 and worked with the Bureau on numerous drafts of the Memorandum of Understanding through October 2009. The IRS has not met with the Federal Bureau of Prisons regarding the Memorandum of Understanding since January 2010. Figure 2 provides an overview of actions the IRS has taken to finalize a Memorandum of Understanding with the Federal Bureau of Prisons since passage of this legislation.
Figure 2: Actions Taken to Finalize the Memorandum of
Understanding
With the Federal Bureau of Prisons
|
Date |
Event |
|
October 15, 2008 |
Inmate Tax Fraud
Prevention Act signed into law. |
|
October 2008 |
The IRS assembled a team
to develop a Memorandum of Understanding with the Federal Bureau of
Prisons. |
|
November 2008 - October
2009 |
The IRS and the Federal
Bureau of Prisons developed numerous drafts of the Memorandum of
Understanding based on review/input from both agencies. |
|
January 2010 |
The IRS met with the
Federal Bureau of Prisons several times to discuss the Memorandum of
Understanding. ********8************************ *************8************************************************ *************8******************************************The
IRS requested an opinion from the Department of Justice Chief Counsel regarding
the Federal Bureau of Prisons’ concerns with its ability to disclose data to
the Department of Justice and/or the prisoner. |
|
March - April 2010 |
Representatives from IRS
Chief Counsel and the Criminal Investigation Division met to discuss the
progress on the Memorandum of Understanding. |
|
July 2, 2010 |
Congress passed the Homebuyers Assistance and Improvement Act of 2010 allowing the IRS to
share prisoner tax data with State Departments of Corrections. |
|
July 27, 2010 |
The IRS received a
response from the Department of Justice Chief Counsel resolving the Federal
Bureau of Prisons’ concerns. |
|
August 31, 2010 |
The IRS sponsored the
Prisoner Tax Compliance Summit. The
purpose of the Summit was to address prisoner tax compliance and develop a
plan to detect, resolve, and prevent noncompliant filings by prisoners. The Summit involved IRS Civil and Criminal
Divisions and the Federal Bureau of Prisons.
|
|
September 29, 2010 |
IRS Chief Counsel
completed the review of the Memorandum of Understanding and forwarded the
revised agreement for processing. |
|
October 2010 |
The IRS stated it is on
target to have the Memorandum of Understanding with the Federal Bureau of
Prisons signed by November 30, 2010. The
IRS plans to contact the first State in early November to begin the
Memorandum of Understanding process. As
a result, no data have been disclosed. |
Source: IRS Criminal Investigation Division.
The IRS faces the same challenges in sharing data with State officials. The IRS will have to establish a separate Memorandum of Understanding with each State governing the sharing of prisoner tax data. However, the IRS was not provided the authority to share data with State Departments of Corrections until July 2010. This does not provide much time for the IRS to establish the necessary agreements with each State before the law expires in December 2011. Management indicated that it met with representatives of the State of Nevada on November 2, 2010. According to IRS management, State representatives are looking forward to starting the prisoner data exchange and hope to have a Memorandum of Understanding signed before the start of the upcoming filing season.[8] Nevada will serve as a pilot for the upcoming filing season prior to including all States. The IRS’s goal is to have a Memorandum of Understanding for each State in place prior to the 2012 processing year (January 2012). Given the amount of time it has taken for the IRS to develop a Memorandum of Understanding with the Federal Bureau of Prisons (more than 22 months), we are concerned that the IRS will be unable to have all the State agreements in place by December 31, 2011, when the authority to share prisoner tax return data ends.
According to the IRS, the first prisoner tax return data will be shared with the Federal Bureau of Prisons and State Departments of Corrections within 90 days of the signing of the Memorandum of Understanding. Using this guidance, the IRS should begin sharing data with the Federal Bureau of Prisons by March 2011. However, because the IRS does not plan to have the Memoranda of Understanding with the States completed until closer to the end of Calendar Year 2011, it is unlikely the IRS will be in a position to share prisoner tax data with many of the States until after its authority expires.
The IRS indicated that the temporary authority to share prisoner tax data was a test to evaluate the effect that the sharing of this information would have on reducing and preventing prisoner fraud. Our discussions with individuals within the IRS and Federal Bureau of Prisons indicate that the sharing of prisoner tax return information will be beneficial toward this goal. Further, prison officials indicated prisoners may use tax refunds to fund other illegal activity within the prison system such as drug trafficking. Prison officials believe that by reducing the flow of money into the prisons, they can also reduce other illegal activity. As such, the IRS should work to extend the data sharing authority to allow ample time for the IRS to establish the framework needed to ensure disclosures are proper and evaluate the benefit of such disclosures.
Legislative Recommendation
Recommendation 1: To provide adequate time to allow for the exchange of information and determine the benefits of the exchange, the IRS should work with the Department of the Treasury to seek legislation to extend the period of time the IRS has to disclose prisoner tax return data to the Federal Bureau of Prisons and State prison officials.
Management’s
Response: IRS management agreed with this recommendation and will
work with the Department of the Treasury to seek legislation that would provide
an extension of the time allowed to disclose prisoner tax return data to the
State and Federal prison officials.
The Calendar Year 2009 Report to Congress on Prisoner Fraud Is Incomplete
The Inmate Tax Fraud Prevention Act did not specify when the IRS’s first report on the filing of false/fraudulent prisoner tax returns was to be published. The Act was signed on October 15, 2008, and as such, we believe the IRS should have issued the first annual report shortly after the end of Calendar Year 2009. The IRS did not issue its Calendar Year 2009 report on the filing of false/fraudulent prisoner tax returns until September 2010.
Processes used by the IRS to identify tax returns filed by
prisoners were not effective. Our review
identified 54,410 returns filed by prisoners that were not identified by the
IRS.
The report stated that the IRS identified 44,944 false/fraudulent prisoner tax returns during Calendar Year 2009.[9] However, the processes the IRS uses to identify prisoner tax returns may result in the IRS understating the amount of prisoner fraud. For example, we identified 54,410 tax returns filed by prisoners for which the IRS did not identify the tax return as a prisoner tax return. As such, these individuals would not be subjected to the specialized fraud checks the IRS has developed for prisoner-filed tax returns and, therefore, may never be identified as a false/fraudulent prisoner tax return. Further, the information reported to Congress is limited to only those tax returns filed by prisoners that the IRS chose to evaluate for fraud.
The primary process the IRS uses to identify tax returns filed by prisoners and to determine if a prisoner tax return is false/fraudulent follows:
Processes do not identify all tax returns filed by prisoners
The criteria used by the IRS to determine if a tax return was filed by a prisoner does not ensure all prisoner tax returns are identified. Our analysis identified 54,410 tax returns that were filed by prisoners during Calendar Year 2009 that were not assigned a prisoner indicator.
*********************2(a)****************************************************************************
************************************************************2(a)***********************.
***************************2(a)*************************************************************************************
**************************************************2(a)*****************************************************************
***2(a)****************************************************************************************************
Information reported to Congress is limited to only those prisoner tax returns the IRS evaluates for fraud
As we have previously reported,[10] the majority of tax returns identified as being filed by prisoners are not screened by the IRS to assess the potential that the tax return is fraudulent. The number of prisoner tax returns screened for fraud is based on the likelihood that fraud is present and resources are available to review tax returns. If a tax return filed by a prisoner does not meet certain criteria, it will not be reviewed for fraud. As a result, the number of false or fraudulent prisoner tax returns the IRS reported in its Calendar Year 2009 report is limited to only those tax returns the IRS selected to work and identified as false/fraudulent. The report does not state the total number of tax returns filed by prisoners nor does it tell Congress how many of the tax returns filed by prisoners the IRS chose to evaluate for fraud.
Limitations in the IRS’s prisoner tax return selection criteria and resources may be allowing prisoners to receive fraudulent refunds. We analyzed a subset of the 540,984 prisoner tax returns we identified. *********************2(a)**********************************************************
*********************************2(a)*******************************.[11] *****************************************************
*********************************2(a)***************************************************************************************
******2(a)*********************************************. We reported similar concerns in a September 2010 audit report.[12] In that report, we reported that the majority of Tax Year (TY) 2009 prisoner tax returns the IRS identified through March 24, 2010, were not screened for potential fraud. Further analysis of these tax returns claiming refunds showed that the tax returns were filed by individuals who had no wage information reported by employers.
While
the IRS can report on the number of false/fraudulent tax returns it identifies,
it cannot measure the extent of prisoner tax fraud. The IRS’s processes do not effectively ensure
tax returns filed by prisoners are identified.
In addition, IRS criteria to select tax returns for fraud assessment do
not ensure all prisoner tax returns identified are evaluated for fraud. As a result, the information provided in the IRS’s
Calendar Year 2009 Report to Congress understates the extent of prisoner tax
filing fraud.
The
Inmate Tax Fraud Prevention Act required the IRS to report to Congress on the
number of false or fraudulent prisoner tax returns the IRS identified. However, to provide adequate context, we
believe the report should also provide information on the total number of
prisoner returns as well as an assessment of the IRS’s ability to prevent
prisoner fraud. For example, it would be
helpful to identify any known limitations or problems the IRS faces in
identifying tax returns filed by prisoners and stopping refunds claimed before
they are issued. Such information would
help Congress in determining whether the IRS has the authority and resources it
needs to improve its efforts to combat prisoner tax refund fraud.
Recommendations
The Commissioner, Wage and Investment Division, should:
Recommendation 2: Provide Congress with a complete assessment of potential prisoner fraud by revising the annual report to include the total number of tax returns filed by prisoners, the number selected for fraud screening, and the number verified false/fraudulent.
Management’s
Response:
IRS management indicated it would continue to report to
Congress all of the prisoner information that is required to be reported by the
Inmate Tax Fraud Prevention Act of 2008, such as the number of false and fraudulent
returns associated with prisoner filings.
In addition, the IRS will respond to future Congressional requests
pertaining to prison-related fraud.
Recommendation 3: Ensure all tax
returns filed by prisoners are processed through the EFDS and that all tax
returns filed by prisoners receive a prisoner indicator.
Management’s
Response:
IRS management partially agreed with this
recommendation. Management stated the
process was reviewed earlier this year and improvements were made that will
improve the IRS’s ability to identify those individuals who are incarcerated
and assign a prisoner indicator to their accounts. Those individuals who are incarcerated later
in the tax year, after the cutoff date necessary for completion of our prisoner
file for the coming filing season, will continue to present a challenge with
regard to immediately assigning a prisoner indicator. The IRS will continue to take steps to
improve processes in this area.
Recommendation 4: Revise prisoner filters to verify the
validity of wages and withholding associated with prisoners incarcerated for a
year who filed tax returns claiming a refund.
For example, these filters should ensure that all tax returns filed by
prisoners who are incarcerated for the full tax year and who file as Single or
Head of Household are screened and verified for fraud before the tax refund is
issued to the prisoner.
Management’s Response: IRS management partially agreed with this recommendation. The IRS currently has screens in place to verify the validity of wages and withholding associated with prisoners identified through the voluntary prisoner list from Federal and State authorities. The logistics of acquiring the prisoner data from a myriad of local, State, and Federal facilities require a specific cut-off date for data collection. Therefore, it would not be possible to limit the filters to prisoners incarcerated for the full tax year. The IRS will ensure identified returns, such as returns filed by prisoners claiming Single or Head of Household filing status where it cannot ascertain prison release during the tax year, are considered for examination or other appropriate compliance treatments.
The Internal Revenue Service Is Working to Improve the Reliability of the Prisoner Data It Uses to Identify Fraudulent Prisoner Tax Returns
The IRS was unable to identify whether prisoner data were received
from all facilities.
Our review of the process used by the Criminal Investigation Division to compile the 2009 prisoner data file identified a lack of managerial oversight to ensure the accuracy and reliability of this file. This is despite the fact that the prisoner file is the single most effective tool that the IRS has to identify potentially fraudulent prisoner tax returns at the time a tax return is filed and prior to issuance of the refund. Our analysis of the 2009 prisoner file identified that key data contained in this file were inaccurate and/or incomplete.
Processes were not in place to validate the accuracy and completeness of the 2009 prisoner file
Our analysis of the 2009 prisoner file identified that approximately 12 percent (360,540 records) of almost 3 million records in the 2009 prisoner file were either missing information and/or had inaccurate information.[13] For example, we identified records with missing or inaccurate SSNs, questionable dates of birth, and questionable release dates. It is imperative that this information is accurate because the IRS must rely on it to identify those tax returns most at risk for fraud. For example, the IRS uses the SSN and name shown on the prisoner file to determine if a tax return was filed by a prisoner. Equally important is the accuracy of the date indicating when an individual was incarcerated. The IRS must rely on this date to determine if an individual was incarcerated during the tax year. Our review identified that the Criminal Investigation Division did not establish processes/procedures to evaluate and attempt to correct missing and/or inaccurate information provided by the Federal Bureau of Prisons and State Departments of Corrections.
Inaccurate and/or missing information in the annual prisoner file
is an issue we previously reported in September 2005.
In addition, we identified that processes were not established to evaluate the completeness of information included in the 2009 prisoner file. Based on discussions with Criminal Investigation Division management, the IRS had not compiled a master list of Federal and State prisons to evaluate the completeness of the data provided. As a result, the IRS was unable to identify whether prisoner data were received from all facilities and/or to take actions to reach out to non-reporting facilities.
Missing/inaccurate information in the annual prisoner file is the same issue we identified and reported on in a September 2005 report. We reported that approximately 19 percent (550,000 of 2.8 million) of the prisoner records in the 2004 prisoner data file were missing information and/or were inaccurate. [14] For example, some of the prisoner records did not have a valid SSN or were duplicated in the file.
The IRS is taking steps to improve the prisoner file data
We notified IRS management of our concerns with the reliability of the prisoner file data in August 2010. Management responded that it was aware of the need to improve the accuracy of information in the prisoner file data and was working with the Federal Bureau of Prisons and State Departments of Corrections toward this goal. In its Calendar Year 2009 report on false/fraudulent prisoner tax returns, the IRS reported it has taken the following steps to improve the completeness and accuracy of the data it receives from prison officials:
In addition, the IRS plans to develop a detailed process to validate prisoner data received from the Federal Bureau of Prisons and State Departments of Corrections as part of the process of compiling the annual prisoner file. Because the IRS is still in the process of developing its data validation plans, it could not provide us with details on how it plans to validate the data or which data elements it will validate. However, our preliminary review of the IRS’s efforts to improve the quality of the prisoner data indicates these efforts should improve the overall quality of the prisoner file.
Recommendation
Recommendation 5: The Commissioner, Wage and Investment Division, should develop a process to assess the reliability (accuracy and completeness) of data received from Federal and State prisons. In addition, a process should be developed to communicate with those prison facilities that provide missing/inaccurate information in an attempt to obtain corrected information.
Management’s Response: IRS management agreed with this recommendation. A result of the Prisoner Tax Compliance
Summit held this summer was the formation of a cross-functional team that is
investigating standardizing and improving the accuracy of data received from
the prisons. The IRS will continue to
seek opportunities to improve the accuracy of the data.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to assess the IRS’s efforts to reduce prisoner fraud, including an assessment of the IRS’s compliance with the Inmate Tax Fraud Prevention Act of 2008.[15] To accomplish our objective, we:
I. Assessed the IRS’s efforts to implement the provisions of the Inmate Tax Fraud Prevention Act of 2008.
A. Reviewed the draft Memorandum of Understanding. We also met with the Criminal Investigation Division and the Federal Bureau of Prisons to obtain their opinion on the implementation’s progress. In addition, we created a timeline of IRS’s efforts to implement the Act.
B. Requested information from the IRS and the Federal Bureau of Prisons on the facilities under their jurisdiction. We also requested their perspective on the usefulness of receiving prisoner tax return data.
II. Assessed the completeness and accuracy of the data contained in the IRS’s Calendar Year 2009 Report to Congress.
A. Evaluated the reliability of the prisoner indicator. We identified 601,677 prisoner tax returns by matching the Individual Return Transaction File[16] to the TY 2008 prisoner file. We then matched the 601,677 prisoner tax returns to the EFDS to determine if the prisoner tax return had a prisoner indicator. We identified 54,410 prisoner tax returns that were either not on the EFDS or were on the EFDS but did not have a prisoner indicator.
B. Evaluated the accuracy and completeness of the information provided to Congress in the Calendar Year 2009 Report to Congress. We used the TY 2008 and TY 2009 prisoner files and the Individual Return Transaction File ******2(a)**************************************
*************2(a)*************************************************** *************2(a)************************. Next, we analyzed the transaction codes on the Individual Return Transaction File for the 32,276 tax returns we identified to determine if the IRS had evaluated the tax return for potential fraud. We then determined if the tax returns that were not evaluated for fraud *****2(a)***** *******2(a)******************************************************************************************************
*******2(a)******************************************************************************************************[17] *******2(a)**************************************************************************************.
III. Determined the completeness and reliability of the IRS prisoner file. We evaluated the process the Criminal Investigation Division used to collect, validate, and consolidate prisoner data into the TY 2009 prisoner file. We verified the SSNs contained in the TY 2009 prisoner file against the Social Security Administration’s High Group Listings showing the SSN groups issued as of May 2008. We also evaluated the reasonableness of the date of birth and prisoner release dates contained in the TY 2009 prisoner file. Our analysis identified 360,540 prisoner records that had missing and/or inaccurate SSNs, dates of birth, and/or release dates.
Data Validation Methodology
Part of our objective was to determine if the IRS prisoner file was reliable. We conducted specific audit tests as discussed in Step III. These tests were designed to identify inaccurate, incomplete, or missing prisoner data. In addition, our testing was designed to determine if prisoner information was provided by all prison facilities within each State and the Federal Bureau of Prisons. The results of our assessment are included on page 10 of this report. We also used the IRS Integrated Data Retrieval System[18] to validate the accuracy of data contained in the Individual Return Transaction File, the EFDS, and the Individual Master File.[19] Specifically, we validated 6 tax return records on the Individual Return Transaction File, 198 tax return records on the EFDS file, and the Master File transaction codes on 24 tax return records.
Internal controls methodology
Internal controls relate to management’s
plans, methods, and procedures used to meet their mission, goals, and
objectives. Internal controls include
the processes and procedures for planning, organizing, directing, and
controlling program operations. They
include the systems for measuring, reporting, and monitoring program
performance. We determined the following
internal controls were relevant to our audit objective: ensuring the provisions of the Inmate Tax
Fraud Prevention Act are implemented, identifying and evaluating the validity
of prisoner tax returns, validating prisoner information received from the
Federal Bureau of Prisons and State Departments of Corrections, and ensuring
prison information is provided by each facility within the Federal Bureau of
Prisons and each State.
Appendix II
Major Contributors to This Report
Michael E. McKenney, Assistant Inspector General for Audit (Returns
Processing and Account Services)
Russell P. Martin, Director
Deann L. Baiza, Audit Manager
Sharla J. Robinson, Lead Auditor
Karen C. Fulte, Senior Auditor
Appendix III
Commissioner C
Office of the
Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Chief, Criminal Investigation Division SE:CI
Deputy Chief, Criminal Investigation Division SE:CI
Deputy Commissioner of Operations, Wage and Investment Division SE:W
Deputy Commissioner of Services, Wage and Investment Division SE:W
Director, Electronic Tax Administration and Refundable Credits, Wage and Investment Division SE:W:ETARC
Director, Refund Crimes, Criminal Investigation Division SE:CI:RC
Director, Strategy and Finance, Wage and Investment Division SE:W:S
Director, Earned Income Tax, Wage and Investment Division SE:W:ETARC:E
Chief Counsel CC
National Taxpayer Advocate TA
Director,
Office of Legislative Affairs
CL:LA
Director, Office of Program Evaluation
and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaisons:
Director, Planning and Strategy, Criminal Investigation Division SE:CI:S:PS
Chief, Program Evaluation and Improvement, Wage and Investment Division SE:W:S:PRA:PEI
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. This benefit will be incorporated into our Semiannual Report to Congress.
Type and Value of Outcome Measure:
· Reliability of Information – Potential; 360,540[20] prisoner records in the annual prisoner file that contain missing or inaccurate information (see page 10).
Methodology Used to Measure the Reported Benefit:
We analyzed the TY 2009 prisoner file to determine if the information contained in the file was reliable. Our analysis included tests to determine if the prisoner file contained valid SSNs, dates of birth, and prisoner release dates.
We matched the first five digits of the SSNs contained in the prisoner file to the Social Security Administration’s records of SSNs issued through May 2008. Our analysis identified 326,248 prisoner SSNs that do not appear to have been issued by the Social Security Administration. Further analysis of these SSNs indicates some of the SSNs on the prisoner file contain all zeros or were blank.
We evaluated the prisoner date of birth on the prisoner file for reasonableness. Our analysis identified 995 records with questionable dates of birth. Specifically, we found:
We also analyzed the prisoner release date for reasonableness. Our analysis identified 33,520 prisoner records with a release date prior to Calendar Year 2007. The IRS requests the Federal Bureau of Prisons and State Departments of Corrections provide information for individuals who are incarcerated ********2(a)***************************. Data are to be provided through August 31 of the current year. As a result, the TY 2009 prisoner file should only contain records for individuals incarcerated for 365 days or more between January 1, 2007, and August 31, 2009. Individuals who were released from prison before Calendar Year 2007 should not be included in the TY 2009 prisoner file.
Appendix V
Internal Revenue Service Request for Prisoner
Information
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE
SERVICE
WASHINGTON, D.C. 20224
Criminal Investigation July 1, 2009
Dear
The purpose of this letter is
to once again request prison and prisoner inmate information which is used by
the Internal Revenue Service to detect fraudulently filed tax returns submitted
in the names and social security numbers of prisoners located within your
jurisdiction. The filing of false returns is not an isolated happening nor is
it confined only to prisoners. However,
prisoners continue to demonstrate their determination to obtain false tax
refunds as evidenced by the increase we are seeing in fraudulent prisoner
refund schemes.
For the past several years,
you have supplied valuable information which has assisted in protecting our
nation’s revenue by identifying millions of dollars in potentially fraudulent
returns filed by prisoners. You are our
most important source of prisoner identity information. We would like to extend
our thanks for assistance provided in previous years. You have contributed significantly to our
ongoing efforts to reduce the government’s vulnerability to fraud and abuse by
preventing the loss of substantial dollars in false refunds. It is paramount that we continue our
cooperative efforts.
As in prior years, there are
two files requested: one for prisoner
information and the other for prisoner/institution information. ***********************************2(a)****************************************************************************************************** **********************************************2(a)******************************************
************************. It is vital
that we received accurate and timely information to allow us to ensure that
prisoner identity information is not utilized to perpetrate fraud. Please send the information directly to Susan
DiBenedetto, Management and Program Analyst, Refund
Crimes office, no later than September 15, 2009 (see attached for address).
Please contact me at
202-622-7140 if you have any questions regarding this request. You may also contact Management and Program
Analyst Susan DiBenedetto at 202-927-4063, or the
Acting Director of Systems and Analysis, Marilyn Davidson at 202-622-4676.
Sincerely,
/s/
John Fowler
John
S. Fowler
Director,
Refund Crimes
Enclosures
cc: [name of technical contact]
Appendix VI
Calendar Year 2009 Report on False and Fraudulent Prisoner Tax Returns[1]
H.R. 7082
(Public Law No: 110-428) – Inmate Tax Fraud Prevention Act of 2008
Background:
This
report is issued pursuant to the requirements of H.
R. 7082 (Public Law No: 110-428) cited as the ‘Inmate Tax Fraud Prevention Act of 2008' (the Act) which was enacted on
Introduction:
The
IRS annually processes millions of tax returns, including those filed by
incarcerated individuals. These
individuals, like all other taxpayers, have a legal obligation to pay their
taxes and are entitled to a refund of any overpaid taxes. For calendar year 2009, the
The
IRS has fraud detection systems in place to identify and prevent the issuance
of tax refunds based on false returns. These
systems include the ability to determine whether the individual filing is
incarcerated. While these systems have
greatly enhanced the way the
Furthermore,
IRS’s Criminal Investigation Division (CI) cannot prosecute every prisoner who
commits refund fraud because we must be prudent with the Federal Government’s limited
investigative and prosecutorial resources.
Investigations of prisoner refund fraud commonly involve the use of
stolen identities and frequently involve co-conspirators that are not
incarcerated. Hence, CI focuses its efforts
on identifying those on the “outside” that assist with these schemes.
In
May 2010, the responsibility for maintaining and assembling the prisoner file
was transferred from CI to the Wage and Investment Division (W&I). Prior to this, a cross-functional Executive
Steering Committee (ESC)—The Pre-Refund Program ESC—chartered a business
process improvement effort to address the quality of the prisoner file and to
streamline the process. W&I adopted
and expanded this plan. High-level
components of the plan included development of a letter to State and Federal
prison authorities and technical contacts requesting that the authorities
submit a file of prisoners incarcerated during the past 32 months, as well as a
list of prison facilities and addresses.
The resulting 102 files (from the states, D.C., and the Federal Bureau
of Prisons) will be consolidated and perfected in the fall of 2010 for systemic
access and matching. The plan also
includes outreach from the Office of the Commissioner, W&I to leaders in
the Federal Bureau of Prisons and state agencies. This outreach effort will be followed up with
interviews with officials to develop a greater understanding of the issues
relating to tax compliance in the prisoner community to improve IRS’s ability
to address these unique issues. In
addition to the collection of the data, W&I is
pursuing a modeling effort to improve IRS’s ability to identify prisoners in
real time with Earned Income Tax Credit claims for which they are
ineligible. Finally, W&I has actively participated in an audit by the Treasury
Inspector General for Tax Administration of the First Time Homebuyer Credit
compliance effort that noted fraudulent claims by prisoners.
States
have identified refund fraud within their respective institutions as a
significant threat and have indicated a desire to obtain information on
fraudulent refund schemes and impose criminal or administrative sanctions on
the offending inmates. In the past,
Title 26 USC Section 6103 Disclosure Laws did not allow for the sharing of tax
return information with prisons (state or Federal). Some progress was made in 2008 with the
enactment of the Inmate Tax Fraud Prevention Act, which authorizes
Findings:
For
calendar year 2009, the
Table 1
(attached): Summarizes
the identified fraudulent returns received from incarcerated individuals by
state. The table includes data for all
50 states as well as the District of Columbia and the Federal Bureau of
Prisons. Identified inmates incarcerated
in Florida, California and Georgia account for 19,841 of the identified
fraudulent tax returns filed. These
three states account for over 44 percent of the 44,944 false prisoner returns
identified.
Table 2
(attached): Summarizes
the identified false and fraudulent returns received from individuals
classified as prisoners by institution within each state. The table includes data for all 50 states as
well as the District of Columbia and the Federal Bureau of Prisons. In certain instances, totals for individual
institutions were below statistical reporting requirements and are aggregated
by state as denoted by an asterisk (*).
In other instances, data for the states was aggregated with other states
at the end of the report in line item “Aggregation of State Institutions below
statistical requirements.” These
instances are denoted in Attachment 2 with a carat (^).
Appendix VII
Management’s Response to the Draft Report
DEPARTMENT
OF THE TREASURY
INTERNAL
REVENUE SERVICE
WASHINGTON,
D.C. 20224
Criminal Investigation
December
15, 2010
MEMORANDUM FOR DEPUTY
INSPECTOR GENERAL FOR AUDIT
FROM: Victor
S. O. Song /s/ Victor S. O. Song
Chief, Criminal Investigation (SE:CI)
SUBJECT: Response to Draft Audit
Report—Significant Problems Still Exist With the Internal Revenue Service
Efforts to Identify Prisoner Tax Refund Fraud (Audit # 201040010)
Stopping prisoner tax
refund fraud is an area of continued focus for the Internal Revenue Service
(IRS). We agree that prisoner tax refund fraud is a very serious issue and
appreciate the TIGTA’s acknowledgment of the progress we have made in this
area.
Your report
recognizes the Wage and Investment Division’s new role, and the support that
Criminal Investigation (CI) is providing with this transition. We also want to
assure you that this transition does not change CI’s commitment to investigate
and seek criminal prosecution when prisoners perpetrate egregious tax
crimes. In fact, this transition will
allow CI to focus more effectively on this aspect.
This year, the
Some of this year’s
accomplishments include:
·
Working
with the Federal Bureau of Prisons (FBOP), all the states, and the District of
Columbia to collect and consolidate prisoner information for the 2011 tax
processing year.
·
Developing
an Information Technology application that will further assist the
·
Holding
a prisoner tax compliance summit in late August 2010 between
·
Chartering
four cross functional teams to develop a five year plan to increase prisoner
compliance:
o
Data
exchange team: focused on improving quality of the information
o
Outreach
team: focused on educating prisoners enrolled in Pre-Release Reentry programs
on meeting their tax obligations.
o
Compliance
team: focused on improving business rules and selection criteria for detecting
and resolving false prisoner returns.
o
Memorandum
of Understanding (MOU) team: focused on facilitating data exchanges per the
Inmate Tax Fraud Prevention Act.
·
Educating
FBOP staff on Frivolous Filings. As a
result, the FBOP will be determining whether FBOP policy changes could hinder
prisoners from creating and filing false returns and documents in the future.
The IRS disagrees with the assertion in the report that the calendar year
2009 report to Congress is incomplete. The
It is
also important to note that there are numerous ways a prisoner could, and does,
earn income while incarcerated.
Prisoners, like all other taxpayers, are responsible for paying federal
income taxes on all taxable income. They further may choose to file a
tax return claiming a refund of withholdings, even if their income
does not meet the minimum filing requirement.
Some prison systems pay minimum wage to their prisoners which total more
than the minimum filing requirement.
Also, many “white collar” prisoners continue to have investments and
businesses operating while they are in prison.
They are receiving income from these investments/businesses in the form
of distributions, dividends, interest, and other income. 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.
Attachment
ATTACHMENT
The Commissioner,
Wage and Investment Division should:
RECOMMENDATION 1: To provide adequate
time to allow for the exchange of information and determine the benefits of the
exchange, the
CORRECTIVE ACTION
We agree with this recommendation. The
IMPLEMENTATION DATE
N/A
RESPONSIBLE OFFICIAL
Director, Earned
Income Credit Office and Pre Refund Program, Wage and Investment Division
CORRECTIVE ACTION MONITORING PLAN
RECOMMENDATION 2: Provide Congress with
a complete assessment of potential prisoner fraud by revising the annual report
to include the total number of tax returns filed by prisoners, number selected
for fraud screening, and the number verified false/fraudulent.
CORRECTIVE ACTION
We will continue to report to Congress all of the prisoner
information that is required to be reported by the Inmate Tax Fraud Prevention
Act of 2008, such as the number of false and fraudulent returns associated with
prisoner filings. In addition,
IMPLEMENTATION DATE
N/A
RESPONSIBLE OFFICIAL
N/A
CORRECTIVE ACTION MONITORING PLAN
N/A
RECOMMENDATION 3: Ensure all tax returns filed by prisoners are
processed through the Electronic Fraud Detection System and that all tax
returns filed by prisoners receive a prisoner indicator.
CORRECTIVE ACTION
We partially agree with this
recommendation. The process was reviewed
early this year, and improvements were made that will improve our ability to
identify those individuals who are incarcerated and assign a prisoner indicator
to their account. Those individuals who are incarcerated later in the tax year,
after the cutoff date necessary for the compilation of our prisoner file for
the coming filing season, will continue to represent a challenge with regard to
immediately assigning a prisoner indicator.
We will continue to take steps to improve processes in this area. *********2(a)*****************************************************************************************
************************************************************************************************************************************************************************************************* *************************************************************************************.
IMPLEMENTATION DATE
Completed
RESPONSIBLE OFFICIAL
N/A
CORRECTIVE ACTION MONITORING PLAN
N/A
RECOMMENDATION 4: Revise prisoner filters to verify the
validity of wages and withholding associated with prisoners incarcerated for a
year who filed tax returns claiming a refund.
For example, these filters should ensure that all tax returns filed by
prisoners who are incarcerated for the full tax year and who file as Single or
Head of Household are screened and verified for fraud before the tax refund is
issued to the prisoner.
CORRECTIVE ACTION
We partially agree with this
recommendation. The
IMPLEMENTATION DATE
December 15,
2011
RESPONSIBLE OFFICIAL
Director,
Earned Income Credit Office and Pre Refund Program, Wage and Investment
Division
CORRECTIVE ACTION MONITORING PLAN
IRS will monitor this
corrective action as part of our internal management system of controls.
RECOMMENDATION 5: The Commissioner,
Wage and Investment Division, should develop a process to assess the
reliability (accuracy and completeness) of data received from Federal and State
Prisons. In addition, a process should
be developed to communicate with those prison facilities that provide
missing/inaccurate information in an attempt to obtain corrected information.
CORRECTIVE ACTION
We
agree with this recommendation. A result
of the Prisoner Tax Compliance Summit held this summer was the formation of a
cross functional team that is investigating standardizing and improving the
accuracy of data received from the prisons.
We will continue to seek opportunities to improve the accuracy of the
data.
IMPLEMENTATION DATE
January 15, 2012
RESPONSIBLE OFFICIAL
Director,
Earned Income Credit Office and Pre Refund Program, Wage and Investment
Division
CORRECTIVE ACTION MONITORING PLAN
IRS will monitor this
corrective action as part of our internal management system of controls.
[1] Pub. L. No. 110-428, 122 Stat. 4839.
[2] Refunds Prevented and Refunds Issued will not total the Refunds Claimed for Calendar Years 2004 through 2008 because Refunds Claimed did not include adjustments made during tax return processing in those years.
[3]
Pub. L. No. 110-428, 122 Stat. 4839.
[4] Administrative actions include the revocation of privileges such as canteen privileges, outside visits, etc.
[5] Homebuyers Assistance and Improvement Act of 2010, Pub. L. No. 111-198, 124 Stat. 1357.
[6] State Departments of Corrections is the term we are using for various State agencies that oversee State prisons.
[7] See Appendix V for a copy of the letter sent to the Federal Bureau of Prisons and State prisons.
[8] The filing season is the period from January through mid-April when most individual income tax returns are filed.
[9] See Appendix VI for this report.
[10] The Internal Revenue Service Needs to Do More to Stop the Millions of Dollars in Fraudulent Refunds Paid to Prisoners (Reference Number 2005-10-164, dated September 28, 2005) and Expanded Access to Wage and Withholding Information Can Improve Identification of Fraudulent Tax Returns (Report Number 2010-40-129, dated September 30, 2010).
[11] We focused our analysis on tax returns filed by individuals incarcerated for an entire tax year and who filed as Single or Head of Household because these individuals have little opportunity to earn reportable income during the tax year. In addition, filing as Single or Head of Household eliminates the probability that reported income was earned by a spouse.
[12] Expanded Access to Wage and Withholding Information Can Improve Identification of Fraudulent Tax Returns (Report Number 2010-40-129, dated September 30, 2010).
[13] See Appendix IV for the details of this measure.
[14] The Internal Revenue Service Needs to Do More to Stop the Millions of Dollars in Fraudulent Refunds Paid to Prisoners (Reference Number 2005-10-164, dated September 28, 2005).
[15] Pub. L. No. 110-428, 122 Stat. 4839.
[16] Contains all edited, transcribed, and error-corrected data from the U.S. Individual Income Tax Returns (Form 1040 series) and related forms.
[17] The Data Center Warehouse provides data and data access services through the Treasury Inspector General for Tax Administration Intranet.
[18] The IRS computer system capable of retrieving or updating stored information. It works in conjunction with a taxpayer’s account records.
[19] The IRS database that maintains transactions and records of individual tax accounts.
[20] The numbers presented below for the 3 categories will not add up to 360,540 because the prisoner file contained duplicate records and a prisoner record could have more than one field with data reliability issues.
[1] The tables referenced at the end of the report have been omitted from this Appendix due to their size.