IRS More Than Triples Reviews of Prisoners’ Taxes, U.S. Says

The Internal Revenue Service improved its performance in spotting fraudulent tax filings and increased its review of prisoners’ returns, according to a government watchdog’s review of the 2011 tax filing season.

The IRS continued to struggle with policing tax credits, the review said. More than 140,000 taxpayers erroneously claimed $140 million in credits because of processing errors, the Treasury Inspector General for Tax Administration said in a report released today.

“Overall, the IRS’s performance during the 2011 filing season has been successful,” said Treasury Inspector General for Tax Administration J. Russell George in a statement. “The IRS continues to face challenges relating to first-time homebuyer credit repayments, verification of the adoption credit and several energy-efficiency tax credits.”

George said he was pleased that the IRS indicated that it was seeking additional authority to weed out applications for “credits that we have found to be problematic.”

Through April 30, the IRS reported that it had selected 199,854 prisoners’ tax returns for screening. That’s more than triple the number of prisoner tax returns screened during the 2010 processing year, according to the report.

The report didn’t include results of the screening.

Prisoner Tax Fraud

Lawmakers and the inspector general have said they are concerned about prisoners using tax filings to defraud the government. In a June Senate appropriations subcommittee hearing, Senator Richard Durbin, an Illinois Democrat, said that since 2004 about $123 million in fraudulent U.S. tax refunds have been issued to people serving in prison.

George’s investigators earlier this year reported that efforts to combat fraud were hampered because the IRS didn’t share prisoner tax return information with federal and state prison officials.

IRS spokeswoman Julianne Breitbeil said in a statement today that the agency appreciated the inspector general’s “acknowledgement of another successful filing season, despite various last-minute tax law changes.”

“The IRS takes refund fraud very seriously,” she said in the statement. “We continually work to refine and improve our fraud detection tools.”

Better Oversight Urged

George made 14 recommendations for improvements by the IRS. Several focused on tightening oversight of tax credits and taking steps to recover those erroneously claimed by taxpayers.

As of April 30, 2011, the IRS reported receiving about 130.7 million tax returns. Of those, 105 million were filed electronically and about 25.8 million were filed on paper. The number of returns filed electronically rose by about 12 percent from the 2010 filing season.

The IRS issued about 98.2 million tax refunds totaling about $277.1 billion.

The IRS reported that it had identified 775,723 tax returns claiming more than $4.6 billion in fraudulent refunds. The agency prevented the issuance of more than $4.4 billion, or 96 percent, of the refunds, according to the report.

This represents a 171 percent increase in the number of fraudulent tax returns identified compared with the 2010 tax-filing season, the report said.

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