Treasury Inspector General for Tax Administration
July 24, 2017
Contact: Karen Kraushaar, Director of Communications
WASHINGTON — More than 24,000 fraudulent tax returns with refunds in excess of $1.3 billion were filed in Calendar Year 2015 using a prisoner Social Security Number (SSN), according to a report that the Treasury Inspector General for Tax Administration (TIGTA) published today.
Refund fraud associated with prisoner SSNs remains a significant problem for tax administration. TIGTA initiated this audit because previous reports it published identified concerns with Internal Revenue Service (IRS) efforts to identify and prevent prisoner tax fraud. TIGTA’s overall objective in this review was to evaluate the effectiveness of corrective actions the IRS took to identify and reduce prisoner fraud.
Under current law, the Federal Bureau of Prisons and State Departments of Corrections are required to provide the IRS with an electronic list of all the prisoners incarcerated within their prison system. This list is the cornerstone of the IRS’s efforts to identify and prevent the issuance of fraudulent refunds to individuals filing false tax returns using a prisoner SSN.
The law also allows the IRS to obtain Prisoner Update Processing System data from the Social Security Administration (SSA) and provide information to the head of the Federal Bureau of Prisons and State Departments of Corrections regarding inmates whom the IRS has determined either may have been issued an improper payment or somehow facilitated the payment.
TIGTA found that IRS processes still do not effectively ensure that the Federal Bureau of Prisons and the State Departments of Corrections comply with prisoner reporting requirements. TIGTA identified 861 prisons that reported prisoner information to the SSA, but did not report that information to the IRS. TIGTA also identified 272,931 inmates who resided in Federal Bureau of Prisons or State Departments of Corrections, but were not reported to the IRS. Approximately $48 million in potentially fraudulent refunds were claimed by 16,742 individuals incarcerated in institutions that did not report prisoner information to the IRS.
In addition, IRS processes to validate and use prisoner data limit its ability to detect potentially fraudulent tax returns. For example, the IRS does not use the data provided by the Federal and State prisons to identify potentially fraudulent prisoner tax returns where the information provided for the prisoner does not match IRS data.
TIGTA identified 1,075 tax returns filed using mismatched prisoner information in which the reported income was not supported by third-party income documents. These 1,075 individuals received refunds totaling more than $3.1 million. Also, the IRS validation process incorrectly identified prisoner records as having a mismatch when the information in fact matched IRS records. TIGTA identified 1,113 tax returns with refunds totaling more than $1.7 million that the IRS did not identify as prisoner tax returns as a result of this error.
Finally, TIGTA found that the IRS did not screen and verify some prisoner tax returns for fraud. TIGTA identified 4,072 prisoner tax returns that reported income and withholding that were not supported by third-party income documents. These filers received potentially fraudulent refunds totaling more than $7.3 million.
“Even though the IRS has made some improvements in its ability to prevent prisoner refund fraud, eliminating this problem continues to be a significant challenge for the IRS,” said J. Russell George, Treasury Inspector General for Tax Administration. “IRS procedures must ensure that Federal and State correctional institutions are reporting prisoners from all of the facilities within their jurisdiction,” he added.
In the report, TIGTA made eight recommendations to the IRS. The IRS agreed to five of the recommendations. It did not agree to pursue a legislative proposal to share mismatch records with prisons, include criminal investigation results in its annual report to Congress, and evaluate the effect of limiting verification to full-year prisoners.
Read the report.
Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.