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I-Team: Audit Shows Extent Of Inmate IRS Scam

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CBS4 Investigates
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MIAMI (CBS4) – A US government’s audit report due to be released on tomorrow shows the Federal Internal Revenue Service ignores hundreds of thousands of potentially fraudulent tax returns filed by prison inmates serving time for other crimes.

The report, by the U.S. Treasury Inspector General for Tax Administration (TIGTA), was obtained exclusively by the CBS4 I-Team and CBS News and follows an I-Team investigation into the prison tax fraud scam that costs taxpayers hundreds of millions of dollars in fraudulent tax refunds every year.

Prison inmates and IRS investigators alike say this tax refund scam has been going on for decades. But the full extent of the fraud is only now coming to light.

“They’ll file 10 or 20 of them (false tax returns) at a time,” said one anonymous Florida prison inmate who witnessed and participated in the scam.

A Florida inmate who asked that the CBS4 I-Team hide his identity for fear he would be hurt exposing this scam, says that inmates simply file numerous 1040, 1040 short and 1040 E-Z tax forms with real names and real social security numbers but false employers, false income and often no W-2 forms attached.

The CBS4 I-Team examined more than a dozen of these fraudulent forms and saw those examples in each case. The inmates would explain on the 1040 tax form that they had simply lost their W-2 form.

The inmates claimed to have earned income ranging from $40,000 to $65,000. All of the employers listed on the tax forms the I-Team reviewed did not exist.

Ultimately, the anonymous inmate said, the inmates who perpetrate this fraud receive fraudulent tax refunds ranging anywhere between $3500 and $6500 per inmate per fraudulent tax return.

I-Team investigator Stephen Stock asked the anonymous inmate: “How much money are we talking about?”

“Millions. Millions (of dollars)” replied the inmate.

According to a new report put together in September, 2010 by the US Treasury Inspector General for Tax Administration, or TIGTA, the inmate actually appeared to underestimate the extent of this fraud.

You can review a copy of that report by TIGTA Audit.

According to the TIGTA audit report 253,929 or 88% of all 287,918 tax returns filed by prison inmates were never screened or flagged by the IRS.

The report also shows that 48,887 of those returns had no W-2 or other wage information filed with the returns.

The TIGTA Audit shows that means the IRS likely paid out more than $130 million dollars in questionable refunds to those inmates who included no W-2 or other wage information with their “returns”.

For another comparison: the report also shows that 249,185 fraudulent tax returns that were filed by people (other than inmates) and actually caught and stopped by the IRS prevented $1.48 billion in fraudulent refunds from being issued. The TIGTA audit shows that is a 50% increase in the number of fraudulent returns caught by the IRS in 2009.

However, when you compare the number of fraudulent returns caught by the IRS and the amount that represents ($1.48 Billion) one also sees the potential amount of fraud represented by prison inmate tax refund theft.

The IRS declined to go on camera to answer questions about why prison inmates continue to receive tax refund checks.

So for perspective, the CBS4 I-Team went to former IRS criminal investigators to see how and why this continues to happen.

“There’s a lot more fraud even in the refund crimes area there’s much more than just the prison schemes,” said Ronald “Ron” Wise, a 33 veteran of and former supervisor in the IRS criminal investigative services.

Wise, along with his business partners Jose Marrero and Luis Rivera spent a combined 89 years as IRS special criminal fraud investigators before retiring and establishing MRW Consulting in Fort Lauderdale.

“The Internal Revenue has no way to compare the W-2 that’s on that tax return with any source information until the end of March at the very earliest,” said Wise. “And in most of these instances these returns are filed very early in the year.”

Wise and his partners agree that the IRS should do more to stop this scam. But they also say the agency is hamstrung by competing priorities and federal rules.

“You would think that creating a funnel (for tax returns from prisoners to go through) would be the type of thing that you can (do to stop this fraud),” said Luis Rivera. “But you do (as an IRS investigator) have limitations. For instance 6103 (Federal tax law), which is where the disclosure provisions of the Internal Revenue Code are found, limit who has access to that information. So that’s a possible area (of reform) to look into (to stop this fraud.)”

“So it really makes it difficult to catch,” said Rivera.

“You do have the ability to maybe add additional pieces to the disclosure provisions (within the IRS) to maybe make the Bureau of Prisons able to screen more in detail the kind of information that goes out of prisons,” said Rivera who retired in October, 2007, after 28 years as a special investigator with the IRS. “So if you know that create funnels there and allow (the law) to give access to the information to the people maybe on the first line and maybe do something on the first line. Additionally, you’re going to have to prosecute some people.”

And they say that Congress, prison officials and the U.S. Attorneys around the country also must do more to stop this prison tax scam.

“It’s not just the IRS that’s being schemed,” said 28-year-veteran IRS investigator Jose Marrero. “So if you could somehow funnel the information and change some of the laws as it relates to prisoners then maybe you can at least stop it even if you can’t prosecute it.”

The TIGTA audit report found the IRS actually paid out a total of at least $112 million in fraudulent refunds to prison inmates. Other federal programs caught and stopped $18 million in fraud.

TIGTA’s audit report confirms that this prison tax scam, while decades in the making, has become more widespread and serious in recent years.

The report calls on Congress to change law to enable the IRS better access to wage and withholding information.

The IRS formally agreed to much of what is in this report. But the IRS hasn’t said what, if anything, it will do to stop or even slow down this type of theft of your tax dollars by inmates already serving time for other crime.

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