IRS Catches More Tax Cheaters — But They’re Already in Prison

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The IRS has caught a lot more people cheating on their taxes. A crackdown on tax fraud this year prevented the issuance of $4.4 billion in bogus refunds, an increase of 171% over the previous year, as the agency ratcheted up its scrutiny of filings by prisoners, according to a report released earlier this month by the Treasury Inspector General for Tax Administration (TGTA).
The issue of prisoners getting undeserved tax refunds has been an embarrassment to the IRS, particularly during these tough economic times. A 2010 report from the same office found that nearly 50,000 inmates had claimed more than $130 million in tax refunds. Most of these returns were not reviewed by the IRS for possible fraud. That changed.

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“As of April 30, 2011, the IRS reported that it had selected 199,854 tax returns filed by prisoners for screening,” the TGTA says. “This represents a 256 percent increase in the number of prisoner tax returns identified and sent to screening when compared with the same period last processing year.”

The IRS, which did not have an immediate comment, has been tightening the screws on tax cheats for years. Tax fraud investigations rose by 14% in fiscal 2010 and recommendations for criminal prosecution rose by 18%. This surpassed the IRS’ internal goals. Audits of millionaires surged by more than 73% last year as the agency continues to grapple with tighter budgets while trying to close the tax gap, the difference between the amount collected and the amount owed.

Though many people despise the IRS, Tax Foundation economist Mark Robyn tells TIME Moneyland that he “has a little bit of sympathy for them. They have to administer a myriad of social policy programs that are implemented through the tax code.”

This gives credence to the argument of many — including the GOP presidential candidates — that the Tax Code is overly complex and needs to be simplified.

Meanwhile, service to taxpayers is suffering. Earlier this year, the independent National Taxpayer Advocate, Nina Olson, noted that many people who seek help from the IRS don’t get it.

“IRS is still failing to answer one out of every four calls it receives from taxpayers who need assistance,” she said in testimony before Congress. “Equally concerning, among calls that do get answered, the average wait time in FY 2010 was nearly 11 minutes, up from about four and one-half minutes in FY 2007.”

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The IRS’s responsiveness to taxpayer correspondence is also poor. The “correspondence inventory” increased by 31% between Fiscal Year 2007 and Fiscal Year 2010. Olson estimates that the IRS spends about 5% of its budget on taxpayer services, which seems inadequate.

Indeed, the TGTA notes that during the last tax season, the IRS allowed 140,596 taxpayers to claim $140.2 million in erroneous tax credits due to “processing errors.” Among the issues that tripped up taxpayers were the First-Time Homebuyer Credit, the Adoption Credit, the Nonbusiness Energy Property Credit, and the Plug-in Electric and Alternative Motor Vehicle Credit.

Though that seems like a considerable amount of money, by the standards of the federal government it’s chicken feed. Remember, the IRS received 130.7 million individual income tax returns and issued approximately 98.2 million refunds totaling $277.1 billion during the 2011 tax season.

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