Tim Robbins and Morgan Freeman in Shawshank Redemption
In the Shawshank Redemption, Tim Robbins plays Andy, a banker falsely imprisoned for a crime he didn’t commit. While in prison, he begins preparing tax returns for the prison guards which leads him to maintaining illegal books for the warden. As Andy says to Morgan Freemans’ character, Red, “I never commited a crime until I went to prison.”
One of the more interesting aspects of the US tax code is that according to our tax law, you are required to report all of your income, even if it is from an illegal activity. Anyone who’s seen the Untouchables knows that they got Al Capone for income tax evasion and not for any of the murders and other crimes he committed. (Or am I supposed to say allegedly committed like they do on TV?) Anyway, and I’m not making this up, the IRS requires all thieves to report the fair market value of the items they stole on their tax returns. Really.
But seriously, the crime I want to talk about is tax fraud. In 2010, the number of fraudulent income tax returns increased by 50%. That’s huge! It’s estimated that 50,000 of those fraudulent returns were filed by prison inmates. The IRS was able to catch about 4,500 of those forms because of falsely claimed Earned Income Credits. EIC fraud is usually the easiest type of fraud to discover quickly because the IRS gets a conflicting tax return pointing out the fraud.
Currently, state and federal prisons are not required to report the status of inmates to the IRS. This makes it tougher for the IRS to catch the fraudulent prison returns and that hurts taxpayers who bear the tax burden while the fraud continues. Of course, not all tax returns filed by prison inmates are fraudulent. There are many legitimate tax returns that should be filed by prisoners. For example: a man is incarcerated in January but he had a full year of working on the outside and caring for his family before going to prison, that’s a very legitimate tax return.
If the IRS had access to inmate status though, it would be much easier to determine which returns were for legitimate work, and which returns were fraudulent. While I’m not inclined to make life easier for IRS agents, this is one case where I think they deserve to have access to the tools that they need to do their job properly.
A new law signed by President Obama now requires the Federal Bureau of Prisons and state prison administrative agencies to provide the IRS with a list of prisoners incarcerated over the previous two years and eight months of the current year. Hopefully this will reduce the tax fraud coming out of our prisons. (IRC Section 6116–October 2011.)