Prisoners Filing Fraudulent Returns and the Efforts to Detect It

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On July 20, 2017, the Treasury Inspector General for Tax Administration (TIGTA) issued its third report in the past several years on the topic of tax fraud perpetrated by prisoners and the efforts to detect and stop it.  As with most TIGTA reports this one bears the catchy title “Actions Need to be Taken to Ensure Compliance with Prisoner Reporting Requirements and Improve Identification of Prisoner Returns.”  While TIGTA found a number of items the IRS needed to improve because that’s its job, I found that the IRS had made significant improvements in this area due to increased effort and legislative assistance.  I last wrote about this issue on April 24, 2015 following the last TIGTA report.

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Prisoners have a reputation for using the tax system to get easy money.  The increase in the use of refundable credits put a target on the back of the IRS as a place to pick up money simply by filing a tax return.  Since tax returns can be filed from prison, using the tax system to gain access to money makes sense for prisoners.  When Congress created the first time homebuyer credit and the refundable adoption credit, it created very attractive targets for the type of fraudulent activity by prisoners.

In this report, TIGTA continues to find problems with the way the IRS administers the program for catching prisoners but the data also shows that the IRS has made significant strides using the relatively new legislation as well as its computers.  The process of seeking prisoner fraud looks very much like the other processes the IRS uses to detect mistakes in individual tax returns.  It relies heavily on matching information with computers rather than people and applying filters.  The ability to tackle the problem without devoting much people power allows the IRS to succeed here in a time of reduced resources.  While this program does not bring in revenue, the ability to keep improper refunds from going out the door is at least as important as putting effort into bringing in money.

One of the legislative changes requires prisons to provide the IRS with the Social Security Numbers of inmates.  The IRS then puts a prisoner indicator on the account of that SSN.  If someone is in prison, we should not expect that person to have significant income, though of course exceptions exist, and we should not expect that person to buy a home, adopt a child or engage in other activities that might trigger a refundable credit.  Having the information from the prisons, allows the IRS to do some immediate filtering that can catch improper claims.

Dealing with prisoner fraud also implicates the broader area of identity theft.  The IRS appears to have made significant strides in attacking ID theft in the past two years and that success has an impact on prisoner fraud since fraudulent returns filed by prisoners will more often than not involve the use of stolen or misused identification.

There is more than one program underway to stop prisoner refund fraud.  In addition to getting the SSNs of prisoners and loading it into the IRS database, prisons are now more carefully monitoring prisoner communication looking for tax fraud.  When a prison identifies a communication as one which might involve tax fraud, it notifies the IRS through the “Blue Bag Program.”  While the amount of correspondence sent to the IRS using this program in 2016 was slightly under 1,000, the existence of the program must serve as a deterrent.  This program would seem to play to a strong suit of prisons the way data matching plays to a strong suit of the IRS.

The prison program did not seem to work as well as one might hope in addressing the cases in which the IRS detects fraud by a prisoner.  The report indicates that the IRS might stop the fraud but little is done to punish the prisoner who engaged in the fraud even though the prisoner is known.  The IRS is not going to be able to prosecute prisoners unless they engage in a fairly wide ranging fraudulent effort just because of the limitations on its resources.  My impression from the report was that when the IRS provided information to the prisons about specific tax fraud activity but that information did not necessarily result in parole denial or other actions that could occur without criminal tax prosecution.  While the report did not discuss this in depth, it would seem that tailoring disclosure laws to allow the IRS to provide prisons with detailed information about an incidence of tax fraud and making that information a part of probation denial and other punishments within prison system without requiring criminal tax prosecution would be a way to strongly deter prisoner fraud for prisoners with hope of release or of the ability to use computers or other forms of communication.

TIGTA found that the IRS had not created a master list of all prisons.  Most of the prisons the IRS seemed not to be getting information from were part of the state and local system.  I would be interested in an analysis of which prisons or which types of prisons are most likely to generate tax fraud.  It would seem to state prisons incarcerating individuals for crimes of violence would be much less likely than federal prisons with more white collar crime and the knowledge base for creating the type of scheme necessary for refund fraud but my thinking about this could be entirely wrong.  Still, a profile of the likely prisoner to commit tax fraud would seem like something useful to create and to target efforts on those prisons or those prisoners where the likely criminals reside.

Since few tax practitioners represent incarcerated individuals, this report may provide little practical information.  I see it as a success story for IRS and Congress at a time when there are not enough success stories about legislative or administrative efforts to fix a problem.  Maybe lessons can be learned from the efforts to stop prisoner fraud and applied to the tax gap generally.  We know where the big holes are.

 

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  1. As the unofficial “Funny Papers” correspondent for PT, I would like to report that this TIGTA investigation led to my discovery that IRS mail processing centers have a “Funny Box” into which, as you might guess, employees who open the mail are told to deposit certain items that look “Funny.” Here are some details. Judge for yourself whether there is enough guidance for employees to make a determination of “funniness.”

    I am intrigued by the instruction, “You are not required, nor should you take additional time to review the attached schedules or line entries to try to find returns to refer to the Funny Boxes. If you notice these items or get a feeling that the return (or group of returns) does not ‘look right’, then take time to review for the specific criteria.”

    3.10.72.2.4 (05-19-2014)
    Types of Mail Received

    Receipt and Control (in IMF sites) should either have a “Funny Box” , or access to one, where returns can be placed for review by Integrity & Verification Operation (IVO) or Frivolous Filer Program (FRP) on a regular basis. BMF sites do not have “Funny Boxes” set up in Receipt and Control, but they should still identify any Frivolous Filer Program (FRP) returns, as well as IMF sites and refer to your local FRP Coordinator. These items can be tax returns, Correspondence, or Undeliverable mail pieces. If there is any type of “protest” statement handwritten or attached that appears to be an imminent threat, IMF and BMF sites will give to your manager to report to TIGTA. Refer to IRM 3.10.72.17 for additional information.

    Exception:
    Some suspicious returns will not be placed in the “Funny Box” . They are batched and routed to Code and Edit for correspondence. Refer to IRM 3.10.72.17(10).

    3.10.72.17 (02-23-2016)
    Referrals to Integrity & Verification Operation (IVO) or Frivolous Filer Program (FRP) and Routing of Questionable Payments

    Three “Funny Boxes” will be set up within Receipt and Control in the IMF Submission Processing Campuses, including all phases (i.e., Extraction, Second Sort, Correspondence, etc.) to identify and pull specific types of documents that are found to be suspicious. There will be one box for Frivolous Filer (FRP) and two boxes for IVO. The IVO boxes are for “Multiples” and “Singles” . Specific criteria is listed in IRM 3.10.72.17.1. Edit the Julian Date (for the received date) in the upper left margin of all returns you refer to any “Funny Box” , if you’re not stamping the official IRS received date.

    Note:
    No employees from Quality Review or Improvement Team will review the contents of the funny boxes. Feedback can be provided to Management by IVO or FRP employees who gather data for the weekly Tracking Sheet.

    Note:
    CI will route mail intercepted by the USPS in Philadelphia as “possible IDT” to “= = = = = = = = = = = = = = = = = = = = ” . Identify this mail in the SCAMPS area. Extract it and identify as “CI/USPS” and place in the IVO Funny Box. If there are any Balance Due with Remit, process those returns normally; “walk to” Deposit if there are any issues with the Recd Date/Posting Date. If there are any refund Form 1040X returns in that group, band them together and place in the Funny Box. Identify as” IVO-CI-X’s” . Mail/fax the Acknowledge copy of the Form 3210, per instructions.

    Route returns that appear to be suspicious, if you notice a trend or a suspicious document, unless they are one of the exceptions listed in (11) below. You are not required to read correspondence for this criteria, but if there are times when you are drawn to look at specific criteria, follow the specific instructions to determine the appropriate box, or whether it has to be mailed to Frivolous Filer or referred to TIGTA.

    Note:
    BMF Sites do not have “Funny Boxes” set up in Receipt and Control, but if you notice any “suspicious returns” or any kind of language or content of the return(s) indicating a “tax avoidance argument” , notify your Lead or Manager to determine if it needs to be referred to one of these functions.

    You are not required, nor should you take additional time to review the attached schedules or line entries to try to find returns to refer to the Funny Boxes. If you notice these items or get a feeling that the return (or group of returns) does not “look right” , then take time to review for the specific criteria. Remember, Receipt and Control is the first stop for these returns. Other downstream functions have instructions to look for this criteria, plus additional items. Also, do not think that your efforts are not appreciated if the returns are sent back to be processed. If the IVO stamp is in the upper left corner, that means they have already reviewed this. They perform certain actions to prevent the taxpayer’s refund, if appropriate, even if we continue to process the return through the pipeline.

    Always keep the envelope when referring returns to a funny box or routing to Frivolous Filer or TIGTA. You can either put the contents back into the envelope if it will remain intact, or staple the envelope to the back of one of the documents and securely rubber band/paper clip the group of documents.

    When “fake” forms/tax returns are received, they should be referred to an appropriate “funny box” , or possibly to TIGTA. If unsure, refer these to your Planning and Analysis analyst. This will have to be determined on a case by case basis. For example, there is a “fake” Form 1099-CC. These should be mailed to Frivolous Filer in OSPC, M/S 4450. However, if there was a “fake” IRP document attached to a tax return showing a “fake” withholding amount that would give the taxpayer an erroneous refund if processed, this would not automatically be referred to Frivolous Filer. It would possibly be accepted by another “Funny Box” function. Do not send all “fake” forms to Frivolous Filer, but be sure to report to your manager.

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