Tax Fraud From Behind Bars

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Written by Chase Sagum | Last Updated June 26th, 2019
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Last year, the IRS paid out over $13 billion in fraudulent tax return claims. In 2012, inmates of our prison system claimed over $1 billion fraudulent returns, up from around $250 million in 2009, but down from a high of $3.7 billion in 2011. How can 138,000 inmates file false returns while behind bars, seemingly where they make little-to-no income.

Deduction and refundable credits are the most common types of fraudulent claims and the Earned Income Tax Credit (EITC) is a common avenue. To combat this, the IRS states that taxpayers claiming this credit are more than twice as likely to face a tax audit and have their claims challenged. This is backed up by the recent decrease from 2011 to 2012, however it continues to be a thorn in the IRS's side.

Many inmates steal the identities of fellow inmates to make these fraudulent claims. By overstating income, within reason, the amount of the EITC increases. Because this credit is refundable, it results in a larger refund.   Recently, Sherman German learned the names, dates of birth, and social security numbers of fellow inmates and their families. From 2008 to 2013, he filed fraudulent tax returns by over stating income, understating withholdings, and producing fake power of attorney forms. He has been sentenced to an addition 66 months in prison and fined nearly a quarter of a million dollars.

The IRS claims that it is very successful at stopping incorrect tax returns, but prisoner data is not always up to date, something that is being corrected. Better tracking of prisoners will decrease the likelihood of a false return being refunded. However, it appears that the problem will continue to exist, and the honest taxpayers are the ones that ultimately suffer.

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