By Lucy Komisar
Dec 4, 2010

I was invited to CNBC’s Power Lunch to talk about a report by the IRS Inspector General that prisoners had received $112 million in tax refunds they shouldn’t have gotten. I surprised the interviewers by turning the question to tax cheating by those outside prison walls.

Many prisoners legitimately file tax returns and seek refunds because they worked during the tax year before they went to prison. But the report showed that 88% of prisoner’s returns were not specially screened, and one in five of those had no wage information from employers.

That W-2 summary of annual wages is filed by employers, who pay part of the Social Security pension tax, and is also filed by employees with their tax returns. Self-employed people, such as company owners as well as independent doctors, lawyers and stock market investors, don’t have their incomes reported to Social Security by third parties nor do they have to file such forms.

The IRS Inspector General says it paid out a total $112 million in fraudulent refunds to prison inmates. Other federal programs caught and stopped $18 million fraudulent refunds.

So, CNBC on Thursday asked me for my thoughts.

I laid the blame at the door of Congress, which blocks most information sharing, including from prisoners, in order to maintain the wall that protects rich individual and corporate fraudsters.

Here is the video.

Here’s what I said:

A lot of the problem should be put at the door of Congress. One of the reasons the IRS has not been able to find out about prisoners filing tax returns and check on them is because they are not getting the information from the federal and state prison systems.

That is just one of the roadblocks thatCongress has put in the way.   Most, of course, relate to people outside prisons. For example not allowing the IRS to get information about employees and their wages and employers that is sent by Social Security to Health and [Human Services]…to the agencies that deal with this.

IRS Inspector General J. Russell George, who shared the camera on the program, said, That‘s exactly right, there needs to be more sharing of information on a more expedited basis from HHS, from Social Security Administration along with state and local prison authorities.

Q: But Lucy, what are the odds of that happening?… Is there a political will to make those changes?

Lucy: The real problem is that Congress in its legislation deliberately puts up barriers to catching fraudsters because it wants to help people cheat on their taxes. It thinks taxes are too high especially for the wealthy and for corporations. And it wants to help them avoid taxes.

Q: Is it related to secrecy? And we don‘t want the IRS to as deep a reach as they could because we’ve seen IRS be abusive in the past.

Lucy: I think a lot of those charges of abuses turned out to be not true. If there was a way to separate out the prisoners from corporations and wealthy people, perhaps Congress would be in favor of having some exchange of information. The real problem is they like the fraud [by the rich and corporations, of course.]

Here are links to the IRS Inspector General’s summary and report.

Here’s the summary: http://www.ustreas.gov/tigta/press/press_tigta-2010-76.htm

And the full report: http://www.ustreas.gov/tigta/auditreports/2010reports/201040129fr.pdf

More detail:

According to the IRS IG report, 253,929 (88 percent) of the 287,918 returns filed by prisoners as of March 24, 2010 were not selected for screening. Of those, 48,887 who claimed refunds totaling more than $130 million had no wage information reported to the IRS by employers. That means one in five of those not screened had no wage information from employers.

This is not a new problem.   There was a similar audit and similar findings in a 2005 during the Bush administration. So, Congress passed a law in 2008 that requires regular updates on prison-based tax fraud.

The IRS has a data mining system that gives points for certain suspicious elements in a tax return.   If a prisoner worked part of the year before being incarcerated, he would have to file a tax return and may have a legitimate refund claim.

Then why aren’t prisoners heading the data mining list? For one, state and federal prisons are not allowed to report the status of inmates to the IRS, so there’s no way to do a cross check. I’m assuming the cheating inmates don’t put down prison as their residence in the forms! The IRS in June called on Congress to give it greater access to prisoner information.

Moreover, the prisoner story, which makes the public angry, highlights a problem which is much more serious in money terms: fraudulent returns claimed by the general population.

For the 2010 filing season, the IRS identified nearly a quarter of a million (249,185) fraudulent tax returns and prevented the issuance of $1.48 billion in fraudulent refunds claimed by the general public. This is a 50 percent increase over the number of fraudulent tax returns identified during the 2009 Filing Season.

Doesn’t Congress care about that? Congressional action till now has aimed at tying the IRS’s hands – mostly because Congressmen are under pressure, largely from business and wealthy supporters, not to give the IRS strong tools against fraud.  Congress cut the IRS budget, resulting in cutbacks in staff investigators. And federal tax law establishes who has access to IRS informatio

As a result, the IRS doesn’t have the access it needs to wage and withholding information. Under the law, the Social Security Administration provides information on employees to the Department of Health and Human Services:   names, Social Security numbers, wages, employer names and addresses. But it allows the IRS access only in cases where a person is claiming earned income tax credit. That is a payment given to the working poor. It’s fine to check up on them.

The IRS has been trying to get legislation to expand its access to HHS data. That would also save the money it spends on verifying claims that its data mining process throws up as suspicious.

The IRS found for 2008, for example, that nearly 2/3 of the 150,000 claims it investigated had valid employment data. A data sharing system might have eliminated the need for those investigations.

So, the ball is in Congress’s court. It needs to require prisons to report their inmates’ names and Social Security numbers to the IRS so there is immediate checking of their claims. And it should allow the IRS to get employee and wage information from the Department of Health and Human Services to check those against refund claims. (Automatic information exchange from offshore banks used by the very rich is another more tantalizing issue.)

Will the U.S. establish tax information sharing to stop tax cheats inside the prisons and ignore those outside? That’s very likely in the current climate.