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Feds Stop Bogus Tax Refund Filings by Prisoners

Adam Rust's picture

Posted February 3, 2011

An agreement reached between the Bureau of Prisons and the IRS will put an end to efforts by prisoners to operate fraudulent tax refund schemes. In the past few years, prisoners have successfully gamed the IRS for millions of dollars in refunds.

It appeared that some prisoners were filing multiple returns, aided by partners on the outside that used false social security numbers. More than half of the false returns came from prisoners at the London Correctional Institution in London, Ohio.

While most low-income filers on the outside generate a refund because of a refundable tax credit, these prisoners were making the money the old-fashioned way: they were stealing social security numbers and filing false returns.

Prisoners can have income that prompts a legal return. Many prisoners work, particularly when they are incarcerated at a minimum security facility. In the past, I have spent time visiting with prisoners, and many of them had jobs. The ones that I shared visits with generally had two work paths. They could work in the prison, or they could find a job through work release. Working inside was hardly renumerative at all. Prisoners made about 90 cents a day. For those on work release, the opportunities were better. Prisoners usually received pay equal to their free co-workers. Still, work release prompted new costs. Those on work release had to pay for transportation to and from their jobs, and they were expected to pay "rent" for their cell. Transportation could easily come to $30 per day.

These work release prisoners could easily have $10,000 in annual income.

Other scenarios would give prisoners an opportunity to earn a tax credit. A person could legally make a head of household claim provided that they supported a dependent for more than six months out of the tax year. This group wouldn't even have to get work release in order to be obligated to file a return.

In all, this is a surprising scenario, but also one that makes sense. It speaks to the need for basic banking services for prisoners. For a long time, prisoners have been able to store their earnings in an account held by the correctional facility. That has some utility. It would give a prisoner the ability to buy goods at the in-house store. But many inmates have a need to access the payments system. A prisoner with family on the outside might need to have his earnings accessible to a spouse, for instance.

Somewhat Fanciful Thoughts

I would like to detour into the question of finances for people in jail or prison. It seems like prisoners are a missing constituent for asset building. Clearly, many prisoners are building some savings while they are inside. How many are able to place that money in some kind of savings account? Given their low discount rate, many might even have the investment time horizon to open a certificate of deposit. Perhaps they should even have some exposure to an equity index fund! One thing needs to be acknowledge - it is helpful when a prisoner leaves incarceration with some money. While it probably isn't the most important variable, it is possible that poverty among recent prison leavers contributes to recidivism.

Then there are the unique needs of inmates that won't be leaving until they reach retirement age. I wonder how many prisoners are able to generate some kind of tax-protected investment account from their earnings. It could be hard to set up a 401 (k) account from a cell. Rules that require automatic enrollment in 401 (k) programs might capture work-release employees.

Last, there is some need for prisoners to have access to the payments system. Prisoners should have some means to share their earnings with their loved ones. One debit card provider, Continental Prison Systems (CPSZ) makes a kiosk system that is now in place in several facilities.