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Tax Administration Inmate Tax Fraud Report Dec 2012

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TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Further Efforts Are Needed to Ensure
the Internal Revenue Service Prisoner File
Is Accurate and Complete

December 18, 2012
Reference Number: 2013-40-011

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process
and information determined to be restricted from public release has been redacted from this document.
Redaction Legend:
2(f) = Risk Circumvention of Agency Regulation or Statute

Phone Number | 202-622-6500
E-mail Address | TIGTACommunications@tigta.treas.gov
Website
| http://www.treasury.gov/tigta

HIGHLIGHTS

FURTHER EFFORTS ARE NEEDED TO
ENSURE THE INTERNAL REVENUE
SERVICE PRISONER FILE IS ACCURATE
AND COMPLETE

Highlights
Final Report issued on
December 18, 2012
Highlights of Reference Number: 2013-40-011
to the Internal Revenue Service Commissioner
for the Wage and Investment Division.

IMPACT ON TAXPAYERS
The number of fraudulent tax returns filed by
prisoners and identified by the IRS has
increased from more than 18,000 tax returns in
Calendar Year 2004 to more than 91,000 tax
returns in Calendar Year 2010. The refunds
claimed on these returns increased from
$68 million to $757 million. The accuracy and
reliability of the Prisoner File affects the IRS’s
ability to stop fraudulent refunds.

WHY TIGTA DID THE AUDIT
Refund fraud committed by prisoners remains a
significant problem for tax administration. The
overall objective of the audit was to assess the
reliability of the IRS Prisoner File.

WHAT TIGTA FOUND
Despite increased efforts by the IRS to improve
the accuracy of the Prisoner File, some prisoner
information contained in the file is inaccurate,
the file contains incomplete records, and not all
facilities that house prisoners reported prisoners.
As such, controls used to ensure the IRS
identifies fraudulent refunds on tax returns
prepared by prisoners are not fully effective.
The majority of the inaccuracies identified are
due to misinformation and *********2(f)*******
*******2(f)*********. The Federal Bureau of
Prisons and State Departments of Corrections
collect and record the information on prisoners,
****************************2(f)***************
****************2(f)************. Further, the IRS
does not have the authority to disclose to the
prisons information related to prisoner-filed

fraudulent tax returns or prisoner identity issues.
This limits the ability of prison officials to curtail
prisoners’ continued abuse of the tax system.
Of the 2.8 million records on the 2012 Prisoner
File, 2.3 million (82 percent) matched identifying
information on Social Security Administration
records, but there is no assurance that
********************2(f)*******************************
********************2(f)****************. More than
260,000 (9 percent) records did not **2(f)***
*************2(f)*****. About 240,000 (9 percent)
records did not match the Social Security
Administration’s records.
In addition, records may be inaccurate or
incomplete on the Prisoner File. Most issues
are beyond the control of the IRS. Nonetheless,
the IRS can take steps to improve its validation
and verification processes.

WHAT TIGTA RECOMMENDED
TIGTA recommended that the IRS conduct a
************************2(f)*************************
********************2(f)****************** and
compare the Institution and Prisoner Files to
ensure all facilities that house prisoners reported
them. Legislation is also needed to permanently
authorize the IRS to share data with the prisons.
IRS management agreed to continue to assess
the effectiveness of the validation activities
performed on the Prisoner File and agreed that
legislation is needed. However, management
stated that new programming and procedures to
detect the ***************2(f)*********************
will be deployed in Calendar Year 2013 and
building a process to check for *****2(f)******** in
the Prisoner File would be a duplication of effort.
TIGTA does not believe the new programming
and procedures will ensure the reliability and
accuracy of the Prisoner File. They are
unrelated to the Prisoner File validation process
and are intended to detect **********2(f)*****
***********************2(f)***************************.
Other IRS offices use the Prisoner File and
would be unaware that the *******2(f)************
on the Prisoner File included ********2(f)*****
****2(f)************.

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220

TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION

December 18, 2012
MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION

FROM:

Michael E. McKenney
Acting Deputy Inspector General for Audit

SUBJECT:

Final Audit Report – Further Efforts Are Needed to Ensure
the Internal Revenue Service Prisoner File Is Accurate and
Complete (Audit #201240036)

This report presents the results of our assessment of the reliability of the Internal Revenue
Service (IRS) Prisoner File. This was a follow-up review to a prior Treasury Inspector General
for Tax Administration audit and was added to our Fiscal Year 2012 Annual Audit Plan
coverage.1 This review addresses the major management challenge of Fraudulent Claims and
Improper Payments.
Management’s complete response to the draft report is included as Appendix IV.
Copies of this report are also being sent to the IRS managers affected by the report
recommendations. If you have any questions, please contact me or Augusta R. Cook, Acting
Assistant Inspector General for Audit (Returns Processing and Account Services).

1

Treasury Inspector General for Tax Administration, Ref. No. 2011-40-009, Significant Problems Still Exist With
Internal Revenue Service Efforts to Identify Prisoner Tax Refund Fraud (Dec. 2010).

Further Efforts Are Needed to Ensure the Internal Revenue
Service Prisoner File Is Accurate and Complete

Table of Contents
Background .......................................................................................................... Page 1
Results of Review ............................................................................................... Page 5
The Internal Revenue Service Prisoner File Contains
Inaccurate Data and Is Incomplete................................................................ Page 5
Recommendation 1:........................................................ Page 14
Legislative Recommendation 2: ........................................ Page 15

Appendices
Appendix I – Detailed Objective, Scope, and Methodology ........................ Page 16
Appendix II – Major Contributors to This Report ........................................ Page 18
Appendix III – Report Distribution List ....................................................... Page 19
Appendix IV – Management’s Response to the Draft Report ...................... Page 20

Further Efforts Are Needed to Ensure the Internal Revenue
Service Prisoner File Is Accurate and Complete

Abbreviations
AMTAP

Accounts Management Taxpayer Assurance Program

IRS

Internal Revenue Service

PTIN

Preparer Tax Identification Number

TIGTA

Treasury Inspector General for Tax Administration

Further Efforts Are Needed to Ensure the Internal Revenue
Service Prisoner File Is Accurate and Complete

Background
Refund fraud committed by prisoners remains a significant problem for tax administration. The
number of fraudulent tax returns filed by prisoners and identified by the Internal Revenue
Service (IRS) has increased from more than 18,000 tax returns in Calendar Year 2004 to more
than 91,000 tax returns in Calendar Year 2010. The refunds claimed on these tax returns
increased from $68 million to $757 million. Although the IRS prevented the issuance of
$722 million in fraudulent tax refunds during Calendar Year 2010, it released more than
$35 million. Figure 1 shows the number of fraudulent tax returns identified by the IRS as filed
by prisoners in Calendar Years 2004 through 2010 and the related refund information.
Figure 1: Fraudulent Tax Returns Filed by Prisoners
for Calendar Years 2004–20101
Calendar
Year

Fraudulent
Tax Returns

Refunds
Claimed2
(Millions)

Refunds
Prevented
(Millions)

Refunds
Issued
(Millions)

2004

18,103

$68.1

$54.6

$13.4

2005

21,254

$80.4

$67.5

$12.8

2006*

N/A

N/A

N/A

N/A

2007

37,447

$165.9

$136.6

$29.2

2008

47,898

$190.4

$162.1

$28.3

2009

44,944

$295.1

$256.0

$39.1

2010

91,434

$757.6

$722.4

$35.2

Source: IRS Criminal Investigation for data through 2009. Refund Tax Compliance Office
for 2010 data. *Data were unavailable in Calendar Year 2006.

To combat this growing problem, the IRS compiles a list of prisoners (Prisoner File) from the
Federal Bureau of Prisons and State Departments of Corrections. Various IRS offices and
functions use the Prisoner File to prevent and detect fraud committed by prisoners, including the
filing of fraudulent tax returns.
1

Calendar Year data is compiled from a separate analysis of Fiscal Year reports. As of October 2012, the IRS stated
that data for Calendar Years 2011 and 2012 (year to date) were not available. See Figure 3 for Fiscal Years 2010
through 2012 data.
2
Refunds Prevented and Refunds Issued may not total the Refunds Claimed for Calendar Years 2004 through 2010
because Refunds Claimed did not include adjustments made during tax return processing in those years.

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Further Efforts Are Needed to Ensure the Internal Revenue
Service Prisoner File Is Accurate and Complete

Laws and regulations relating to prisoners and tax administration
The Inmate Tax Fraud Prevention Act of 2008.3 This Act was signed
October 15, 2008. It stated that the Secretary of the Treasury could disclose to the head
of the Federal Bureau of Prisons any return information with respect to individuals
incarcerated in Federal prisons who the Secretary has determined may have filed or
facilitated the filing of a fraudulent return to the extent that the Secretary determines that
such disclosure is necessary to permit effective Federal tax administration.
Congress amended the Act4 in July 2010 to allow the IRS to share prisoner tax data with
the State Departments of Corrections5 as well. Provisions included in the act also require
the Secretary of the Treasury to provide an annual report to Congress on the filing of
false or fraudulent tax returns by Federal and State prisoners. The act allowing the
IRS to disclose false prisoner tax return information to the prisons expired on
December 31, 2011. The Prisoner Fraud Reduction Act of 2011 was introduced in
July 2011 to make the authority permanent, but no further action was taken on this act.
In August 2012, the Family and Business Tax Cut Certainty Act of 2012 was introduced.
This act included a section to improve and make permanent the provision authorizing the
IRS to disclose certain return and return information to certain prison officials.
Executive Order 13250.6 In November 2009, in Executive Order 13250, Reducing
Improper Payments and Eliminating Waste in Federal Programs, the President directed
Federal agencies to identify “ways in which information sharing may improve eligibility
verification and prepayment scrutiny.” The President further reinforced the importance
of reducing payment errors, and recovering improperly paid amounts, in a memorandum
issued in March 2010 on Finding and Recapturing Improper Payments. Building on
these initiatives, in June 2010, the President issued a memorandum on Enhancing
Payment Accuracy Through a “Do Not Pay List,” in which he underscored that:
While identifying and recapturing improper payments is important,
prevention of payment errors before they occur should be the first priority
in protecting taxpayer resources from waste, fraud, and abuse. In those
cases where data available to agencies clearly shows that a potential
recipient of a Federal payment is ineligible for it, subsequent payment to
that recipient is unacceptable. We must ensure that such payments are
not made.

3

Pub. L. No. 110-428, 122 Stat. 4839.
Homebuyer Assistance and Improvement Act of 2010, Pub. L. No. 111-198, 124 Stat. 1356.
5
State Departments of Corrections is the term we use for various State agencies that oversee State prisons.
6
Exec. Order No. 13250, 3 C.F.R. 274 (2010).
4

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Further Efforts Are Needed to Ensure the Internal Revenue
Service Prisoner File Is Accurate and Complete

United States-Korea Free Trade Agreement Implementation Act.7 On
October 21, 2011, the President signed into law the United States-Korea Free Trade
Agreement Implementation Act. The law states that not later than September 15, 2012,
and annually thereafter, the head of the Federal Bureau of Prisons and the head of any
State agency charged with the responsibility for the administration of prisons shall
provide to the Secretary of the Treasury, in electronic format, a list of all the prisoners
incarcerated within the prison system for any part of the prior two calendar years or the
current calendar year through August 31.8 Although the prisons were providing data to
the IRS voluntarily, this law made the exchange of prisoner data with the IRS mandatory.
The Prisoner File is the cornerstone of the IRS’s efforts to prevent the issuance of
fraudulent refunds to prisoners
For the 2012 Prisoner File, the IRS instructed prison officials to send information for currently
incarcerated prisoners9 as well as prisoners released between January 1, 2009, and
August 31, 2011. The requested fields and maximum character lengths were explained in the
instructions sent to the prisons. The 2012 Prisoner File consists of 2.8 million records.
In those instructions, the IRS asked the prisons to provide:


***********************************2(f)*******************, if available.



A list of institutions for the IRS Institution File with one record for each institution within
its purview. The IRS instructions state the institution code included in the prisoner data
provided by prisons must correspond to one of the institution codes in the Institution File.



All possible addresses for each institution.

A prior Treasury Inspector General for Tax Administration (TIGTA) review reported the
Prisoner File was inaccurate and incomplete
In December 2010, the TIGTA reported that: 10


Approximately 12 percent (360,540 records) of almost three million records on the
2009 Prisoner File were either missing information and/or had inaccurate information.
For example, the file contained records **********2(f)********************and
questionable release dates.

7

Pub. L. No. 112-41, §502.
The Fiscal Year 2011 IRS letter requested information for currently incarcerated prisoners as well as prisoners
released between January 1, 2009, and August 31, 2011.
9
A prisoner may be reported under the Federal Bureau of Prisons or a State Department of Corrections facility or
another facility, such as a halfway house, the prisoner’s home address due to house arrest, a parole office, or a work
address due to participation in a work release program.
10
TIGTA, Ref. No. 2011-40-009, Significant Problems Still Exist With Internal Revenue Service Efforts to Identify
Prisoner Tax Refund Fraud (Dec. 2010).
8

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Further Efforts Are Needed to Ensure the Internal Revenue
Service Prisoner File Is Accurate and Complete



The IRS had not compiled a master list of Federal and State prisons at that time to
evaluate the completeness of the data provided. Therefore, the IRS was unable to
determine if it had received prisoner data from all facilities and, consequently, contact
could not be made with the nonreporting facilities.

The TIGTA recommended that the IRS develop a process to assess the reliability (accuracy and
completeness) of data received from Federal and State prisons and to communicate with the
prison facilities that provide missing or inaccurate information.
This review was performed at the Wage and Investment Division’s Return Integrity and
Correspondence Services, Earned Income Tax Credit, Refund Tax Compliance’s Planning and
Policy Development Office in Atlanta, Georgia; the Federal Bureau of Prisons in Grand Prairie,
Texas, and Washington, D.C.; and the Departments of Corrections in California, Florida,
Georgia, Massachusetts, and Texas from April through August 2012. In addition, employees
were interviewed from the Accounts Management Taxpayer Assurance Program (AMTAP),
Criminal Investigation’s Refund Crimes Office, the Return Preparer Office, and the Information
Technology function’s Dependent Database and Electronic Fraud Detection System. We
conducted this performance audit in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on our
audit objective. We believe that the evidence obtained provides a reasonable basis for our
finding and conclusions based on our audit objective. Detailed information on our audit
objective, scope, and methodology is presented in Appendix I. Major contributors to the report
are listed in Appendix II.

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Further Efforts Are Needed to Ensure the Internal Revenue
Service Prisoner File Is Accurate and Complete

Results of Review
The Internal Revenue Service Prisoner File Contains Inaccurate Data
and Is Incomplete
Despite increased efforts by the IRS to improve the accuracy of the Prisoner File, not all prisoner
information contained in the file is accurate, the file contains incomplete records, and not all
prisons reported prisoners. As such, it appears that the controls used to ensure the IRS identifies
fraudulent refunds on tax returns prepared by prisoners are not fully effective.
The majority of the inaccuracies identified are due to misinformation and *******2(f)********
*******2(f)*********. The Federal Bureau of Prisons and State Departments of Corrections
collect and record the information on prisoners, ************************2(f)***********
***********************************2(f)****************************************
***********************************2(f)****************************************
***********************************2(f)**************************************
***********************************2(f)*********.
Of the 2.8 million records on the 2012 Prisoner File:


2.3 million (82 percent) records matched the ***2(f)*****11 **********2(f(****
***2(f)**on the Social Security Administration’s records.12



260,000 (9 percent) records did not contain ***2(f)*****************.13



240,000 (9 percent) records did not match information provided by the Social Security
Administration.

Additional concerns identified include:


Records on the Prisoner File contained blank fields.



Not all prisons on the Institution File reported prisoners.

************2(f)*******************.
**********************************************2(f)******************************************
************************************************2(f)******************************************
************************************************2(f)***********************.
13
****************************2(f)**********************************************************
******************************2(f)************************************************************
******************************2(f)**********************************************.
11
12

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Further Efforts Are Needed to Ensure the Internal Revenue
Service Prisoner File Is Accurate and Complete



Prisoners were reported under institutions that were closed, and numerous prisons
reported only one prisoner each.



The Institution File contained records with blank institution codes and included
institutions that are closed.

Most of these issues are beyond the control of the IRS. The IRS has to rely on information
provided by the prisons to identify prisoner-filed tax returns, and the IRS does not have the
authority to disclose information to the prisons related to prisoner-filed fraudulent tax returns or
prisoner identity issues. Nonetheless, the IRS can do a better job of ensuring the Prisoner File is
accurate and complete by taking further steps to improve its validation and verification
processes.
The IRS is taking steps to improve the Prisoner File data
After the TIGTA reported issues with the Prisoner File in Fiscal Years14 2005 and 2011,15 the IRS
took steps to obtain more accurate data, including developing a cross-functional team to
investigate standardizing and improving the accuracy of data received from the prisons and
reaching out to leaders of the Federal Bureau of Prisons and State Departments of Corrections to
develop a greater understanding of the issues related to tax compliance in the prison community.
After receiving information from prisons for the 2012 Prisoner File, the IRS took the following
steps to validate and verify the accuracy of the 2.8 million records:


Attempted to identify structural errors (e.g., ******************2(f)*********,
missing release dates, entry dates later than the release date), formatting errors, duplicate
records, and inconsistencies with prior year’s data.



Compared its listing of institutions (Institution File) to the institution codes on the
2012 Prisoner File and attempted to correct any inaccuracies with the States and the
Federal Bureau of Prisons.



Followed up with the technical contacts in the various correctional systems to resolve
identified errors and issues. Working with the State systems, the IRS sought explanations
or corrections for errors. Ten of the 52 prison systems16 provided corrected data to the
IRS once they were informed of missing data or data errors. The other 42 did not send in
corrected data.

14

A 12-consecutive-month period ending on the last day of any month, except December. The Federal
Government’s fiscal year begins on October 1 and ends on September 30.
15
TIGTA, Ref. No. 2005-10-164, The Internal Revenue Service Needs to Do More to Stop the Millions of Dollars in
Fraudulent Refunds Paid to Prisoners (Sept. 2005); TIGTA, Ref. No. 2011-40-009, Significant Problems Still Exist
With Internal Revenue Service Efforts to Identify Prisoner Tax Refund Fraud (Dec. 2010).
16
The 52 prison systems include the 50 State Departments of Corrections, the District of Columbia, and the Federal
Bureau of Prisons.

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Further Efforts Are Needed to Ensure the Internal Revenue
Service Prisoner File Is Accurate and Complete

In addition, during the validation process, the IRS marks records that have identifying
information that matches the Social Security Administration data. However, it does not attempt
to rectify the records that do not match because the IRS does not have the authority to share this
information with the prisons.
The number of records reported on the 2012 Prisoner File increased by 15 percent over the
2011 Prisoner File. IRS management stated some of this increase was a result of their increased
communication with the State prisons.
To improve the reliability of the 2013 Prisoner File, in April 2012 the IRS issued a letter to
prison officials informing them of its pending request for prisoner data. The IRS sent a
follow-up letter to the prisons in July 2012 that included specifics for formatting data and lessons
learned from previous experiences. The IRS also assigned IRS liaisons for each State so that
contact information could be included in e-mails sent to the technical contacts for each prison
system. As of August 2012, the IRS was in the process of developing procedures to validate and
verify the 2013 Prisoner File.
In addition, the IRS plans to schedule a Prisoner File process meeting with all users of the
2013 Prisoner File, including the Information Technology function (for the Electronic Fraud
Detection System and the Dependent Database) and the Return Preparer Office. It also plans to
consult with the Wage and Investment Division Research and Analysis function to compile a list
of known formatting errors to assist the States in compiling their data and performing validation
checks prior to submission.
The 2012 Prisoner File contains inaccurate identifying data on individual
prisoners
Test results showed that approximately 240,000 (9 percent) ***********2(f)**************
**2(f)*** did not match information provided by the Social Security Administration.
Inconsistencies included:


*****************************2(f)************************************.



*****************************2(f)*********************17 *****************
*****************************2(f0***************************************
*************2(f)********************.

Additionally, the 2012 Prisoner File does not identify prisoners **********2(f)*************
***************2(f)**********************. More than 700 records on the Prisoner File
were *************************************2(f)******************************
******************************************2(f)*********************************
****************************2(f)***************************.
17

*******************************************2(f)***************************************.

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Further Efforts Are Needed to Ensure the Internal Revenue
Service Prisoner File Is Accurate and Complete

**************************************2(f)*************************************
***2(f)************
**************************************2(f)*************************************
**************************************2(f)*************************************
**************************************2(f)*************************************
**************************************2(f)*******************************
**************************************2(f)*************************************
***********2(f)******.
**************************************2(f)***********************************
**************************************2(f)***********************************
**************************************2(f)*************************************
****************2(f)**********************************.
***************************************2(f)********************************
***************************************2(f)*******************************,
***************************************2(f)**********************************
***************************************2(f)************************************
***2(f)****************.
**********************2(f)**************************
*****************************************2(f)**********************************
*****************************************2(f)********************************
*****************************************2(f)**********************************
*****************************************2(f)**********************************
*****************************************2(f)**********************************
*****************************************2(f)**********************************
************************************2(f)******************18 .
The 2012 Prisoner and Institution Files are incomplete and may contain
inaccurate data
The 2012 Prisoner File contains blank fields, prisoners were not reported on the Prisoner File for
each prison listed on the Institution File, and in some cases prisoners were reported on the
Prisoner File for institutions that are closed. In addition, prisons on the Institution File contained
blank institution codes and several prisons reported only one prisoner each.

18

***********************************************2(f)*******************************************
************************2(f)*************************.

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Further Efforts Are Needed to Ensure the Internal Revenue
Service Prisoner File Is Accurate and Complete

Incomplete records on the 2012 Prisoner File
Almost 160,000 (6 percent) of the 2.8 million records contain blank release dates and more than
8,300 (0.3 percent) records show blank incarceration dates. The IRS uses the release and
incarceration dates to help determine if an individual was incarcerated during the time period he
or she was claiming wages, withholding, and credits on a tax return. The IRS stated that it
worked with the prisons to determine the reasons for the blank release dates. Some explanations
provided were that the individual was awaiting trial and had not been convicted yet or the
prisoner was an escapee.
In addition, more than 260,000 (9 percent) of the 2.8 million records *******2(f)********
*********2(f)**********. The TIGTA and the IRS are unable to determine how many of
those records are for prisoners **************************2(f)***********************
**************2(f)******.
Incomplete and inaccurate data on the 2012 Prisoner and Institution Files
Of the 4,192 prisons listed on the 2012 Institution File, 574 (14 percent) institutions had a blank
institution code, 1,328 (32 percent) institutions used an institution code on the Institution File
that did not match an institution code on the Prisoner File, and 181 (4 percent) institutions
reported only one prisoner each.
The IRS did not compare the 2012 Institution File to the 2012 Prisoner File to identify
nonreporting institutions. It also did not perform additional research to determine if prisoners for
these institutions were reported under other institutions or if the institutions should be reporting
prisoners at all. This makes it difficult for the IRS to ensure it has a complete list of prisons and
prisoners.
A test of a random sample of 25 of the 1,328 institutions on the Institution File that did not match
an institution code on the Prisoner File showed:


10 (40 percent) institutions were not listed on the State Departments of Corrections
websites.



6 (24 percent) institutions were administrative offices and without the IRS contacting the
facility, it cannot be determined if they should have reported prisoners.



5 (20 percent) institutions should have reported prisoners.



4 (16 percent) institutions used a truncated institution code on the Institution File but
reported prisoners under the complete institution code on the Prisoner File.

TIGTA also performed a search for closed prisons. Two states, Michigan and North Carolina,
had lists of closed prisons on their Department of Corrections websites. TIGTA compared the
closed prisons for these States to the 2012 Institution File and determined that 12 closed prisons
for Michigan and 10 closed prisons for North Carolina were listed on the 2012 Institution File.
Page 9

Further Efforts Are Needed to Ensure the Internal Revenue
Service Prisoner File Is Accurate and Complete



Of the 12 closed Michigan prisons listed on the 2012 Institution File, six reported
prisoners.



Of the 10 closed North Carolina prisons listed on the 2012 Institution File, prisoners were
reported for all 10 closed prisons.

For the 16 closed prisons that reported prisoners, 168 prisoners were reported on the Prisoner
File.
Some institutions on the Institution File appear to have only administrative functions and
therefore would not house prisoners. For example, the Federal Bureau of Prisons included the
Accounting Operations, Security Background Investigations, Centralized Records Office, and
Sacramento Intelligence Unit as prisons on the 2012 Institution File. Additionally, a prisoner
may be reported under the Federal Bureau of Prisons or a State Department of Corrections
facility or another facility, such as a halfway house, the prisoner’s home address due to house
arrest, a parole office, or a work address due to participation in a work release program. Without
additional research, the IRS cannot determine if these facilities should have reported prisoners.
Several IRS functions rely on the Prisoner and Institution Files to identify fraudulent tax returns
filed by prisoners, revoke Preparer Tax Identification Numbers (PTIN) held by prisoners, and
assist in tax scheme detections. Without accurate or complete information, these functions are
unable to consistently identify tax returns filed by prisoners, ******************2(f)*******
************************************2(f)*************************************
**2(f)****************. In addition, the IRS may be unable to accurately determine whether
a tax return filer was capable of earning the income and withholding claimed or if they were
entitled to claim credits during a specific tax period.
The IRS’s ability to resolve discrepancies in prisoner records is limited
******************************************2(f)*****************************
******************************************2(f)******************************
**************************2(f)*******************. However, when the IRS identifies
records that do not match Social Security Administration records, it does not have the authority
to contact prison officials to try to resolve the discrepancies.
IRS Counsel has determined that the IRS does not have the authority to disclose information to
the prisons **********2(f)***************************** does not match Social Security
Administration records. IRS Counsel stated that once the data are received by the IRS, Internal
Revenue Code (IRC) Section 6103 applies. This section of the law states that tax returns and
return information shall be confidential. Return information is defined as:
… a taxpayer’s identity, the nature, source, or amount of his income, payments, receipts,
deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld,
deficiencies, overassessments, or tax payments, whether the taxpayer’s return was, is
being, or will be examined or subject to other investigation or processing, or any other

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Further Efforts Are Needed to Ensure the Internal Revenue
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data, received by, recorded by, prepared by, furnished to, or collected by the Secretary
with respect to a return or with respect to the determination of the existence, or possible
existence, of liability (or the amount thereof) of any person under this title for any tax,
penalty, interest, fine, forfeiture, or other imposition, or offense, ….19

The IRS began discussions with the Social Security Administration in June 2011 to identify
*****************************************2(f)**********************************
*****************************************2(f)*******************************
*****************************************2(f)*********************************
*****************************************2(f)**********************.
In Fiscal Year 2012, the Office of Management and Budget coordinated a meeting between the
IRS, the Social Security Administration, the Federal Bureau of Prisons, and other agencies
interested in the prisoner data to identify the most efficient way for different agencies to obtain
prisoner information. However, disclosure issues exist for both the Social Security
Administration and the IRS due to the lack of statutory authority to exchange any prisoner
information they maintain.
A prior law gave the IRS authority to inform prison officials about prisoners who
filed fraudulent tax returns, but the law expired
The Inmate Tax Fraud Prevention Act of 200820 and the amendment in July 201021 gave the IRS
the authority to disclose prisoner tax return information to the Federal Bureau of Prisons and the
State Departments of Corrections if the prisoner filed or facilitated the filing of a fraudulent tax
return. However, this authority expired on December 31, 2011.
In a previous audit report,22 the TIGTA recommended that the IRS work with the Department of
the Treasury to seek legislation to extend the authority to disclose prisoner tax return data to the
Federal Bureau of Prisons and State prison officials. This would have allowed adequate
time for the exchange of information and to determine the benefits of the exchange. On
December 15, 2010, the IRS agreed with the recommendation and stated that it would work with
the Department of the Treasury to seek legislation that would provide an extension of the time
allowed to disclose prisoner tax return data to the State and Federal prison officials.
The Prisoner Fraud Reduction Act of 2011 was introduced in July 2011 to make the authority
permanent, but no further action was taken on this act. In August 2012, the Family and Business
Tax Cut Certainty Act of 2012 was introduced which included a section to improve and make
permanent the provision authorizing the IRS to disclose certain return information to certain
prison officials.
19

Internal Revenue Code § 6103 (b)(2)(A).
Pub. L. No. 110-428, 122 Stat. 4839.
21
Pub. L. No. 111-198, 124 Stat. 1356.
22
TIGTA, Ref. No. 2011-40-009, Significant Problems Still Exist With Internal Revenue Service Efforts to Identify
Prisoner Tax Refund Fraud (Dec. 2010).
20

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In early August 2011, the IRS established the Refund Tax Compliance Office to combat the
increase in prisoner tax fraud and conduct fraud detection work. The team worked with prison
authorities to set up Memorandums of Understanding that would allow them to share fraudulent
tax return activities in an effort to reduce prisoner tax fraud. Before the authority to share this
information expired on December 31, 2011, the IRS had set up Memorandums of Understanding
with 22 of the State Departments of Corrections and with the Federal Bureau of Prisons.
The President’s Revenue Proposals23 for Fiscal Year 2013 contained a legislative proposal24 to
reinstate the IRS’s authority to disclose return information with respect to individuals
incarcerated in Federal or State prisons who the IRS determines may have filed or facilitated the
filing of a fraudulent return. The proposal also includes the following additions to the prior
provision:


Make the authorization for disclosure permanent.



Authorize the disclosure of actual returns (and not just return information).



Allow disclosure directly to officers and employees of the Federal or State prison agency.



Allow re-disclosure of return information to contractors that operate prisons.



Clarify the authority for the re-disclosure to, and use of return information by, legal
representatives to defend against inmate claims.

IRS functions are negatively affected by inaccurate and incomplete prisoner
information
Various IRS offices and functions use the Prisoner File, for example, to identify a fraudulent tax
return or screen tax return preparers. Inaccurate and incomplete data can affect the performance
of these functions and hinder their ability to efficiently fulfill their program goals. Figure 2
shows the IRS functions that use the Prisoner File.

23
24

General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals, Department of the Treasury.
The legislative proposal would revise Internal Revenue Code § 6103(k)(10).

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Figure 2: Functions Using the IRS Prisoner File

Refund Tax Compliance Office –
Planning and Policy Development
Team

The Blue Bag Program is conducted by State and Federal
prison officials. They monitor prisoners’ tax returns and
tax-related correspondence. When they identify potential fraud,
the prisons forward the tax return or correspondence to the
Refund Tax Compliance Office for further review. More than
500 prisons participate in this program.
The Automated Questionable Credit Program reviews tax
returns with questionable refunds or issues identified through
TIGTA findings. These could include tax returns marked with a
prisoner indicator.

Return Preparer Office

The IRS uses the Prisoner File to identify individuals, who
already have PTINs to determine if they may be a prisoner. The
Return Preparer Office sent 35 letters to PTIN owners who had
a Social Security Number, full name, date of birth, and name
control that matched information on the Prisoner File. Based on
responses to the letters, the IRS revoked nine (26 percent)
PTINs and plans to revoke four (11 percent) more. In addition,
three (9 percent) PTINs expired during the verification process.

Information Technology –
The Dependent Database

************************************2(f)********************************
************************************2(f)*******************************
**************2(f)*****

Criminal Investigation

********************************2(f)*************************************
********************************2(f)*****************************
********************************2(f)***************************
******************2(f)******

Source: IRS management for each of the offices listed.

After the Refund Tax Compliance Office compiles the Prisoner File, the Information
Technology, Electronic Fraud Detection System function inputs it into an existing database and
creates extracts for other functions and systems. Its primary function related to the Prisoner File
is to identify tax returns filed by prisoners. ***********************2(f)****************
*************************2(f)*************************.
Other IRS functions and offices analyze the prisoner tax returns to determine if the claim for
refunds and credits are accurate. For example, the AMTAP verifies*********2(f)***********,
*****************************************2(f)**********************************
*****************************************2(f)**********************************
**********2(f)************************

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For Fiscal Year 2012 through June 30, 2012, the AMTAP identified more than
170,000 fraudulent tax returns from prisoners and prevented the IRS from issuing $2.1 billion
in fraudulent refunds. Figure 3 shows the total number of prisoner returns and the related
fraudulent refunds detected and stopped by the AMTAP.
Figure 3: Accounts Management Taxpayer Assurance Program
Prisoner Returns and Refunds Detected and Stopped
Number of Returns
and Refunds

Fiscal Year
2010

Fiscal Year
2011

Fiscal Year
2012*

Returns Detected

77,563

168,703

173,106

Returns Stopped

69,461

157,949

156,482

Refunds Detected

$384M

$2.8B25

$2.1B26

Refunds Stopped

$350M

$2.7B

$2.1B

Source: Accounts Management Taxpayer Assurance Program management.
*As of June 30, 2012.

Recommendation
Recommendation 1: The Commissioner, Wage and Investment Division, should ensure that
the validation and verification of future IRS Prisoner Files includes: 1) *******2(f)**********
*************************2(f)*********************** 2) a comparison of the
Institution and Prisoner Files to ensure all facilities that house prisoners reported them.
Management’s Response: IRS management agreed to continue to assess the
effectiveness of the validation activities performed on the Prisoner File. The IRS’s
assessment is an ongoing process that is an integral part of the annual construction of the
Prisoner File. Programming and procedures to be deployed for the 2013 Filing Season27
are intended to detect the **************2(f)***************, immediately stop the
processing of the returns, and elevate them for review to ascertain if the use is legitimate.
Because these procedures will apply to all returns, building that process into the Prisoner
25

The increase in refunds detected from Fiscal Year 2010 to 2011 was a result of improved data models, increased
staff resources, and working approximately 91,000 more tax returns. In addition, eight prisoner tax returns that
totaled approximately $1 billion in refunds were detected and stopped in Fiscal Year 2011.
26
The amount of refunds detected and stopped in Fiscal Year 2012 includes two prisoner tax returns that totaled
$1.1 billion in refunds.
27
The period from January through mid-April when most individual income tax returns are filed.

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File will be a duplication of effort. By April 15, 2014, the IRS will review the
performance of the new programming and procedures and ascertain if additional actions
should be taken regarding the Prisoner File validation process.
The IRS will also continue to work with the stakeholders in the prisoner information
reporting process, including other Federal and State agencies, to evaluate the
effectiveness of data provided to the IRS and its use in preventing refund fraud by the
prisoner population. The evaluation will include the effectiveness of prisoner housing
information and how it is used. This is an ongoing process.
Office of Audit Comment: TIGTA believes the new programming and procedures
are unrelated to the Prisoner File validation process and will not ensure the reliability and
accuracy of the Prisoner File. The new programming and procedures to be deployed for
the 2013 Filing Season are intended to detect the use of ***********2(f)********
***************************************2(f)*****************************
*************2(f)******************. The IRS will not identify records of prisoners
*****************************2(f)*************************************.
Other IRS offices also use the Prisoner File and will not be aware that the information on
the Prisoner File includes ******************2(f)****************.

Legislative Recommendation
Recommendation 2: To reduce the risk of prisoners ****2(f)**************** to file
fraudulent tax returns, legislation is needed that would permanently authorize the IRS to share
data with the prisons when it determines that *****************2(f)*****************.
Management’s Response: IRS management agreed with this recommendation, as
having the ability to share data with the prisons would be beneficial to both the IRS and
the prisons. Implementation of this recommendation is dependent on legislative action.

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Appendix I

Detailed Objective, Scope, and Methodology
Our overall objective was to assess the reliability of the IRS Prisoner File. We determined
whether the Prisoner File is accurate and complete. We also assessed the steps the IRS takes and
the controls the IRS has in place to ensure the data in the Prisoner File are accurate and
complete, including the steps the IRS takes to obtain and validate the data on the Prisoner File.
To accomplish our objective, we:
I.

Determined whether the data the IRS receives from the prisons are complete.
A. Determined what information the prisons are required by law to share with the IRS.
B. Determined what data the IRS requests from the prisons.
C. Analyzed the Prisoner File to determine whether data are received in accordance with
the law.

II.

Determined whether the IRS has coordinated with Federal and State Government
agencies to receive prisoner information.
A. Interviewed IRS management to determine whether they have coordinated with other
agencies about the prisoner data.
B. Interviewed the Social Security Administration to determine what information it has
on prisoners and whether they share information with the prisons when the data do
not match their records.

III.

Determined what steps the prisons take to ensure the Prisoner File data are complete and
accurate.
A. Selected a judgmental sample1 of six prison systems and officials to visit/interview.
We visited prisons and interviewed prison officials in the top five States and the
Federal Bureau of Prisons with the most prisoners and the highest amount of
fraudulent tax return refunds, as reported by the IRS in the 2009 report to Congress
(Federal Bureau of Prisons, California, Florida, Georgia, and Texas) and a local
prison in Massachusetts. We did not select a statistical sample of prison systems and
officials to visit/interview due to time, resource, and travel budget constraints, and
because we did not plan to project the results.

1

A judgmental sample is a nonstatistical sample, the results of which cannot be used to project to the population.

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B. Determined how the prisoner information is entered into the prison system and
whether any validations are performed on the data.
C. Determined who extracts the prisoner data to provide it to the IRS and whether any
validations are performed on the data.
IV.

Determined the IRS’s procedures to ensure the data on the Prisoner File are complete and
accurate.
A. Interviewed IRS management to determine the steps they take to ensure the Prisoner
File is complete.
B. Interviewed IRS management to determine the steps they take to ensure the Prisoner
File is accurate.
C. Tested a random sample of 25 of the 1,328 institutions on the Institution File that did
not report prisoners on the Prisoner File. We did not select a statistical sample
because we did not plan to project the results.

V.

Determined which IRS programs rely on the data in the Prisoner File and how incomplete
or inaccurate data affect them.
A. Interviewed IRS management to determine which IRS programs use the Prisoner File
and how the File is used.
B. Determined the effect on the programs’ use of the File for any issue identified with
the accuracy or completeness of the Prisoner File.

VI.

Determined the accuracy of the IRS’s Processing Year 2012 Prisoner File by comparing
the file to the Social Security Administration’s data.

Internal controls methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance. We determined the following
internal controls were relevant to our audit objective: processing of the prisoner data to build the
Prisoner File, coordination efforts with Federal and State Government agencies to receive
prisoner information, validation of the Prisoner File data for completeness and accuracy, and the
effect of data anomalies on users of the Prisoner File. We evaluated these controls by
interviewing IRS management and select Federal and State Government agency officials,
evaluating the data the IRS receives from the prisons for completeness, and analyzing the IRS’s
Processing Year 2012 Prisoner File by comparing the file to the Social Security Administration’s
data.

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Appendix II

Major Contributors to This Report
Randee Cook, Acting Assistant Inspector General for Audit (Returns Processing and Account
Services)
Paula Johnson, Acting Director
Ken Carlson, Acting Audit Manager
Wilma Figueroa, Audit Manager
Pamela DeSimone, Lead Auditor
Jack Forbus, Senior Auditor
Geraldine Vaughn, Senior Auditor
Jerome Antoine, Auditor

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Appendix III

Report Distribution List
Commissioner C
Office of the Commissioner - Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Chief Technology Officer OS:CTO
Deputy Commissioner, Services and Operations, Wage and Investment Division SE:W
Director, Earned Income Tax Credit, Wage and Investment Division SE:W:RICS:EITC
Director, Return Integrity and Correspondence Services, Wage and Investment Division
SE:W:RICS
Director, Strategy and Finance, Wage and Investment Division SE:W:S
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaison: Chief, Program Evaluation and Improvement, Wage and Investment Division
SE:W:S:PEI
Assistant Secretary of the Treasury for Tax Policy

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Appendix IV

Management’s Response to the Draft Report

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obligations. We are pleased to report that for Calendar Year 2012 every agency
required to report under the provisions of the KFTA did so.
While the formal reporting requirements under the KFTA represent a substantial step
forward in refining and improving the accuracy of the prisoner file, there are still
significant challenges presented by the multiple jurisdictions involved and differences
in the solutions the various state agencies have implemented to address their respective
needs. Not all prisoners under the jurisdiction of reporting correctional agencies are
housed in conventional prison facilities. For example, reports on the prisoner
population can also include individuals under the supervision of parole offices, medical
facilities, or the reporting offices for inmates serving their sentences under home
confinement. Furthermore, some states contract with county and city jails to house
inmates, which can contribute to wide fluctuations in the populations and prisoner
movement among locations.
Data cleansing and validation activities are performed on the information we receive
from the reporting entities. This is done to perfect the data to the greatest extent
possible and maximize the effectiveness of the prisoner file as a fraud detection tool.
As noted in the report, prisons do not always maintain records
***********2(f)*************** (SSN) associated with prisoners.
**************************2(f)***************
**********2(f)*******************. Consequently, we recognize that the prisoner
file will contain incomplete information for some prisoners; however, we believe that
any risks associated with incomplete records are mitigated by the matching activities
we perform on all returns against information obtained from the Social Security
Administration (SSA). We also follow up with the correctional agencies to request
corrected data. Last year, ten agencies provided additional information,
***2(f)******* ***2(f)*********** We are committed to maintaining good working
relationships with the correctional agencies and ensuring they understand our need for
accurate data. We believe these efforts will continue to improve the accuracy and
reliability of the prisoner file. With regard to long-term improvements in the
availability of reliable information on the prisoner population, the IRS, as the report
notes, is working with the Office of Management and Budget, the SSA, the FBOP, and
other federal agencies to identify actions necessary to promote the efficient and
effective sharing of prisoner data within government.
Attached are our comments on your recommendations. If you have any questions,
please contact me, or a member of your staff may contact Jodi L. Patterson, Director,
Return Integrity and Correspondence Services, at (202) 283-7673.
Attachment

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Attachment
RECOMMENDATION
RECOMMENDATION 1
The Commissioner, Wage and Investment Division, should ensure the validation and
verification of future IRS Prisoner Files includes: 1)******************2(f)******
******************2(f)************************* 2) a comparison of the
Institution and Prisoner Files to ensure all facilities that house prisoners reported them.
CORRECTIVE ACTION
We will continue to assess the effectiveness of the validation activities performed on
the Prisoner File. Our assessment is an ongoing process that is an integral part of the
annual construction of the Prisoner File. Programming and procedures to be deployed
for the Calendar Year 2013 Filing Season are intended to detect the ***2(f)**********
*****2(f)****************, immediately stop the processing of the returns, and elevate
them for review to ascertain if the use is legitimate. Since these procedures will apply
to all returns, building that process into the Prisoner File will be a duplication of efforts.
By April 15, 2014, we will review the performance of the new programming and
procedures and ascertain if additional actions should be taken regarding the Prisoner
File validation process.
We will also continue to work with the stakeholders in the prisoner information
reporting process, including other Federal and State agencies, to evaluate the
effectiveness of data provided to the IRS and its use in preventing refund fraud by the
prisoner population. The evaluation will include the effectiveness of prisoner housing
information and how it is used. This is an ongoing process.
IMPLEMENTATION DATE
Assessment of decedent identity protection measures: April15, 2014
Assessment of data use and validation: Implemented and ongoing
RESPONSIBLE OFFICIAL
Director, Return Integrity and Correspondence Services, Wage and Investment Division
CORRECTIVE ACTION MONITORING PLAN
We will monitor this corrective action as part of our internal management control
system.
LEGISLATIVE RECOMMENDATION:
RECOMMENDATION 2
To reduce the risk of prisoners ******2(f)************** to file fraudulent tax
returns, legislation is needed that would permanently authorize the IRS to share data
with the prisons
***********************************2(f)*************************.

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2

CORRECTIVE ACTION
We agree with this recommendation , as having the ability to share data with the prisons
would be beneficial to both the IRS and the prisons. Implementation of this
recommendation is dependent on legislative action.
IMPLEMENTATION DATE
N/A
RESPONSIBLE OFFICIAL
N/A
CORRECTIVE A CTION MONITORING PLAN
N/A

 

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