THE BLOG

Tax Fraud From Behind Bars

03/09/2011 11:14 am ET | Updated May 25, 2011

Maybe you will get lucky and get a refund from the IRS. Lots of prisoners try to get one too - by lying to Uncle Sam. Every year they rake in multiple millions of dollars. Outrageous!

At prisons across the country all incoming mail is opened and checked for contraband before the prisoner ever receives it. What would be considered mail tampering on the outside is standard operating procedure in a prison.

Amazingly, however, outgoing prison mail is mostly just bundled up and shipped out via the U.S. Postal Service with no inspection. The only exception is if a particular prisoner is under suspicion for some sort of criminal activity.

That's a shame because this failure to monitor mail is the first weak link in a chain of inmate tax fraud that's been going on for years, according to government investigators. In just the 2009 tax year, for example, prisoner inspired IRS fraud cost you, me and every other taxpaying American at least 39 million dollars.

How could this happen? How could a prisoner fake an income tax return from behind bars and have it go unnoticed? Many times an outsider's bank account is used to launder the money but many times sizeable refund checks are deposited directly into prison bank accounts. Doesn't any official notice?

While the rest of us sweat to scrape up every W-9 or 1099 form, every receipt and all the corresponding documentation the I.R.S. requires by the annual mid-April deadline, these incarcerated mooks are blatantly committing another criminal act -- right under the noses of their guards.

A recent Inspector General's audit of the problem revealed how state prisoners have been getting away with it. First, often using the prison library computer, the inmate steals a Social Security number. While surfing on-line it's also pretty easy to locate a list of bankrupted businesses. The prisoner takes the name of one of them and lists it as their former employer on a 1040 form. Oh, and the form is also readily available on line and simple for the prisoner to print out and fill out.

In this era of record business failures it is nearly impossible for the IRS to track the truthfulness of every 1040 form that lists a bankrupted employer.

The federal audit also disclosed just how gutsy these inmates get. More than two dozen of them asked for and got $50,000 worth of federal tax credits for electric and other alternative fuel cars. Never mind that they couldn't drive a car if they wanted to! And, the report concluded the 39 million dollar fraud from 2009 was likely even larger because some 10 thousand returns from prisoners were never scrutinized.

If the first weak link is the state prison system which allows the fake tax forms to be mailed out unchallenged, the second overlooked failsafe has to be the IRS itself. The agency is sending out millions of dollars in undeserved tax refunds to convicts without so much as a double check of Social Security numbers or a second thought as to why a check would be going to a prison address in the first place. Apparently there's no built in filter at the IRS to flag checks going to state prisons.

That's got to change!

In 2008, Congress finally got around to passing a law that allows the IRS to share information about suspicious tax returns with the federal Bureau of Prisons. To date, there's no law that allows the IRS to share with state prison officials. That's got to change too. Especially for the states of California, Florida, Georgia and others with the largest prison populations.

Some prisoners are brilliantly smart. Not smart enough to have stayed out of jail, mind you - but intelligent enough to use their abundance of free time to come up with all sorts of scams launched from their prison cells. Just because this IRS scam is getting some publicity now that doesn't mean it's going to stop. With no way for the IRS and the state to legally communicate I can just hear the sarcastic titters of the cons now, "What? I'm gonna get in trouble? What? Are they gonna put me in jail?"

It ticks me off that at a time when my family and so many others strain to cut corners and watch every penny this fraud continues year after year with no apparent shift in government procedures to stop it.

Not long ago I wrote here about how the General Accounting Office had identified for Congress 30 areas in which - if they acted - multiple billions of dollars could be saved. Crooks bilking our Medicare and Medicaid systems, unnecessary military spending and people who simply haven't paid their taxes could be more enthusiastically pursued. So far no action has been taken.

How's this for an idea? From this point forward - and for the rest of the year - how about Congress agrees to expeditiously take up each and every one of those 30 areas outlined by the independent GAO? And once those multiple billions of dollars is saved - can someone please offer a law that lets the IRS share information with state prison officials to stop prison IRS fraud?

Anybody out there with me?

Diane Dimond can be reached through her web site at www.DianeDimond.com - Her latest book is "Cirque Du Salahi" available at Amazon.com