Audit Finds Significant Increase in Fraudulent Tax Returns Filed by Prisoners

Prisoners are filing phony federal income tax returns in record numbers and the Internal Revenue Service (IRS) continues to pay refunds despite repeated warnings from the Treasury Inspector General for Tax Administration.

Inspector General J. Russell George told a U.S. House oversight subcommittee on February 26, 2014 that according to the IRS, the number of fraudulent tax returns filed with a Social Security Number assigned to a prisoner had skyrocketed from around 18,000 in 2004 to more than 186,000 in 2011.

“The refunds claimed on these tax returns increased from $68 million to $3.7 billion,” George testified.

“Refund fraud associated with the use of Social Security Numbers of and by prisoners to file false tax returns remains a significant problem for tax administration,” he stressed.

The increase in fraudulent tax returns occurred despite repeated warnings to the IRS to be alert to the problem of phony returns filed by prisoners, and despite several changes to federal law to make it easier for authorities to detect them.

The 2011 figures were more than double the previous year, when prisoners filed 91,000 fraudulent income tax returns claiming refunds totaling $757 million.

Further, in 2010, nearly 1,300 prisoners improperly received more than $9 million in home-buyer tax credits, according to the Inspector General. [See: PLN, Feb. 2011, p.18].

Dwayne Selvey, an Ohio state prisoner who explained in detail to a Congressional committee in 2005 how he had defrauded the IRS of nearly $4 million in phony tax refunds, said it was not difficult at all.

“It was about one of the easiest things I’ve ever done in my life,” Selvey told Cleveland’s ABC News Channel 5 in an April 2014 news report. “When I first started off, I didn’t use a W-2 form, I just used a piece of paper and wrote down like I was the owner of the company.”

Selvey said he bought “two Cadillac Escalades, a couple of lake homes and expensive clothes” with the money, which he squirreled away in multiple bank accounts and accessed after he was released. He was later jailed on a parole violation and returned to prison.

“I’m not sure why I got away with it for as long as I did,” he stated.

The television station also reported that two other Ohio prisoners serving time for murder, Michael Murdock and Ronald Dean Wells, had claimed more than $139,000 in fraudulent tax refunds.

“They just made up an amount of purported withholding and said, hey, IRS – give me back that withholding you took out,” said Assistant U.S. Attorney John M. Siegel.

Another prisoner, Brandon Mace, was sentenced to over six years in federal prison in May 2013 after filing fraudulent tax refund claims over a two-year period.

“He had it timed so he could pick it up after he got out of prison, but by the time he got there, the post office had sent the $207,000 check back to the IRS,” Siegel said.

In Minnesota, two prisoners face federal charges of conspiracy and filing false claims stemming from a tax fraud scheme they allegedly ran from prison. A federal indictment handed down in August 2014 alleges that Tanka James Tetzlaff, 39, and Tony Terrell Robinson, 30, were behind the scam, collecting more than $400,000 in fraudulent refunds by using the names and Social Security Numbers of fellow prisoners.

“The defendants prepared and filed the tax returns, or arranged for them to be prepared and filed, knowing they were false,” according to the indictment.

George told the Congressional subcommittee that the Inspector General had warned as early as December 2010 that “significant problems exist with the IRS’s efforts to identify the use of Social Security Numbers of and by prisoners to file false tax returns to commit tax refund fraud,” noting that legislation passed in 2008 and again in 2010 gave the IRS the authority to disclose prisoner tax information to the Bureau of Prisons and state Departments of Corrections.

“However, as of October 2010, the IRS had not completed the necessary agreements to share prisoner information,” George testified. “As a result, no information had been disclosed to either the Federal Bureau of Prisons or state Departments of Corrections at that time.”

In January 2013, the American Taxpayer Relief Act gave the IRS permanent authority to share information with the Bureau of Prisons and state prison officials; however, no agreements were in place by January 2014.

George also faulted the IRS’s process for reviewing and compiling prisoner data, saying the agency “lacked managerial oversight to ensure ... accuracy and reliability” of the prisoner data file. He called the omission “critical” because the file is used to flag phony tax returns before any refunds are issued.

As recently as December 2012, George said, the Inspector General warned that “despite increased efforts by the IRS to improve the accuracy of the Prisoner File, there were inaccuracies in the prisoner information, the file contained incomplete records, and not all prisons reported [data on] prisoners. As such, the controls used to ensure that the IRS identifies fraudulent refunds on tax returns prepared by prisoners were not fully effective.”

George conceded that “most of these issues we identified are beyond the control of the IRS because the IRS has to rely on information provided by the prisons to identify prisoner-filed tax returns.”

For example, in 2012, after the IRS informed prison officials of missing data or errors, only “ten of the 52 prison systems [including the Bureau of Prisons and District of Columbia] provided corrected data to the IRS,” according to an Inspector General’s audit released on December 18, 2012.

“We are committed to maintaining good working relationships with the correctional agencies and ensuring they understand our need for accurate data,” wrote Peggy Bogadi, head of the IRS’s Wage and Investment Division. “We believe these efforts will continue to improve the accuracy and reliability” of the agency’s prisoner data file.

George testified that “the IRS can do more to ensure that the Prisoner File is accurate and complete by taking further steps to improve its validation and verification processes.”

In spite of its focus on tax fraud, the 2012 Inspector General’s audit noted that many prisoners have a legitimate reason to file tax returns and obtain refunds, especially if they are newly incarcerated or have investment income. The audit recognized, for example, that the IRS issued $35.2 million in legitimate tax refunds to prisoners in 2010.

Further, tax fraud by prisoners represents only one of numerous problems facing the nation’s tax collection system. The Rasmussen College School of Business found, for example, that total estimated losses due to corporate tax evasion in 2009 were $29.3 billion, based on the estimated 84% compliance rate for individual filers.

And Citizens for Tax Justice (CTJ) reported in a 2011 study that 30 major corporations, including General Electric, Boeing, Verizon and Mattel, realized profits exceeding $205 billion from 2008 to 2011, yet paid no federal income tax between 2008 and 2010. One year later, 26 of those companies – including online retailer Amazon, which made billions in 2011 sales – had still paid no federal income tax, CTJ found.

If those companies had “paid the full 35 percent corporate tax rate over the 2008-11 period,” the organization reported, “they would have paid $78.3 billion more in federal income taxes.”

Which indicates that the real criminals committing tax fraud can be found in corporate boardrooms, not among prisoners.

Sources: “Testimony of the Honorable J. Russell George, Treasury Inspector General for Tax Administration, before the Committee on Appropriations, Subcommittee on Financial Services and General Government, ‘Oversight Hearing – Internal Revenue Service,’” (February 26, 2014); “Further Efforts are Needed to Ensure the Internal Revenue Service Prisoner File is Accurate and Complete,” Treasury Inspector General for Tax Administration, Reference No. 2013-40-011 (December 18, 2012); www.accountingtoday.com; www.thinkprogress.org; www.rasmussen.edu; Associated Press; www.newsnet5.com; www.9news.com; www.forbes.com

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