Prisoner Tax Fraud Now ‘A $1 Billion Problem’
Policy + Politics

Prisoner Tax Fraud Now ‘A $1 Billion Problem’


The Internal Revenue Service has long-struggled with weeding out prisoner tax fraud—an issue that costs taxpayers tens of millions of dollars every year. Despite the IRS’s efforts, the problem is getting worse. 

Tax fraud committed by incarcerated people has skyrocketed in the last few years. Fraudulent refund claims by prisoners ballooned to more than $1 billion in 2012 from $166 million in 2007, according to federal auditors. Likewise, the number of fraudulent claims has increased from 37,000 to 137,000 over that same period. And that number is going to keep climbing unless the IRS gets its act together. 

Related: How the IRS is Botching Tax Collections 

That’s the takeaway from a new scathing report by the Treasury Inspector General for Tax Administration, the federal watchdog tasked with keeping tabs on the IRS. IG J. Russell George blamed the agency for not taking up his previous recommendations to combat the fraud. 

With an annual tax gap of close to $400 billion, every billion counts, including the money scammed by prisoners. According to its federal auditor, there is more the agency should be doing to prevent this kind of abuse.

“Refund fraud committed by prisoners has grown to become a billion dollar problem," George said in a statement. "More needs to be done, as is explained in our report. It is incumbent upon the IRS to act aggressively to prevent tax fraud wherever it occurs, particularly behind bars." 

For its part, the IRS caught most of the fraudulent claims. It blocked about $936 million of the $1 billion in 2012, the IG said. Still, it paid out about $70 million in bad refunds that year.

In some cases, inmates have raked in hundreds of thousands—if not millions of dollars in fraudulent claims. Dwayne Selvey, a North Carolina inmate, claims to have defrauded the government out of nearly $4 million over a decade by using real names and social security numbers and making it look like they were owed a refund between $3,000 and $6,000.

“It was about one of the easiest things I've ever done in my life," Selvey told ABC News. 

Related: Is the Embattled IRS Obamacare’s Next Nightmare? 

The auditor suggested a number of things the agency should do to prevent more money from getting in the wrong hands. 

First, George said the agency should start sharing relevant information with federal or state prison officials. He also blamed the IRS for not submitting prisoner fraud reports to Congress in a timely manner—adding that the reports do not address all aspects of prisoner fraud. 

The IRS said it is working to improve prisoner fraud detections agreed most of TIGTA's six recommendations.

“The IRS has continued to build on processes to detect and stop potentially fraudulent refund claims made by prisoners,” Debra Holland, commissioner of the IRS’s Wage and Investment Division, said in a statement.

“The IRS has been in touch with all 50 state Governors, the Federal Bureau of Prisons and the District of Columbia, as well as the Departments of Correction in each state inviting them all to collaborate with the IRS in our efforts to deter tax fraud by inmate and prisoner tax fraud.”

We hope that “invitation” had an RSVP.

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