The Joys of Tax Fraud

Talk about stifling entrepreneurship. And it’s not like they’re being paid a lot of money and certainly not enough to provide a nest egg if and when they emerge into the outside world. Just consider what they’re earning (aside from the money they’ve earned through their creative approach to taxes.)

According to a 2002 Economic Policy Institute study, federal prisoners who work for Federal Prison Industries then earned between $.23 and $1.15 anhour and the average wage was $.92 an hour. In Massachusetts today, prisoners earn $.50 to $5 a day for the menial tasks they perform. (In July 2010 in Massachusetts, Bristol County Sheriff Thomas Hodgson and some Republican lawmakers presented a proposal to quit paying prisoners for their work. According to one of the legislators, that would save the state $3 million a year.) Whether it’s the 2002 amounts or Massachusetts today, neither figure is enough to provide the prisoner with a nest egg for that happy day when he or she emerges from prison’s confines a free person. Prisoners may well be puzzled as to why creativity within prison walls is being discouraged and, indeed pursued. To them it may well seem mean-spirited.

Modeling themselves on many good citizens outside prison walls, prisoners have discovered the opportunity for wealth accumulation through tax fraud. According to recent reports, prisoners have, since 2009, filed 44,944 fraudulent tax returns and those returns have netted the prison filers more than $295 million in tax refunds. Of course that is chicken feed compared with the tax fraud committed by upstanding citizens who are not incarcerated. A good example of this is offered by Chicago lawyer, Edwin Meyer. Mr. Meyer helped create and sell fraudulent tax shelters that cost the government billions of dollars in tax revenue, a sum that makes the work of the criminal population already incarcerated seem insignificant if not downright paltry.

Notwithstanding the insignificant amount collected by creative prison inmates, in January 2010, Senators Charles Schumer and Charles Grassley asked the IRS to crack down on prisoners committing tax fraud. It is, of course, something of a challenge to get prisoners to stop engaging in criminal activities since they are already in prison and the worst that can happen if they are found guilty of extra-curricular criminal activities, as it were, is that they’ll simply stay put longer than they otherwise might have and if subject to a life sentence, that amounts to no punishment at all. The threat of having their wages garnished in order to recoup the millions they have acquired, is also not very real. Nonetheless, from the taxpayers’ perspective it is worth cracking down on tax fraud wherever it is found and the only question taxpayers may have is why it was so easy for prison inmates to file fraudulent tax returns.

The answer, according Senator Schumer who is cited in BNA’s Daily Tax Report, is that in the past, even after the IRS learns of the prisoners’ activities, although it can “share taxpayer information with the Federal Bureau of Prisons in order to punish prisoners [who have filed fraudulent tax returns] prison officials do not want to carry out additional enforcement unless more details about the charges can be released. Because some of those details include sensitive information, IRS has declined to share any information with the prisons bureau.” It is not clear what kind of sensitive information is contained in a fraudulent tax return. The IRS knows the answer since it has not been sharing information with the Bureau of Prisons. Senator Grassley, the incoming ranking member of the Judiciary Committee says that the failure of the IRS and the prisons bureau to share information suggests that “prisoner tax fraud is a low priority for the federal government.” The good news is, that is about to change and, as a result, it may become harder for prisoners to collect large sums of money by filing fraudulent tax returns.

According to a report by the Associated Press on February 3, 2011, the IRS and the Federal Bureau of Prisons have signed a memorandum of understanding that should slow, if not eliminate the ability of prisoners to accumulate nest eggs by filing fraudulent tax returns. The memorandum is designed to eliminate the confidentiality issue that had theretofore thwarted information sharing. According to Ed Ross, spokesperson for the Bureau of Prisons, the memorandum of understanding “allows us to receive information from the IRS when they suspect inmates have filed fraudulent taxes. Because of privacy issues, we were unable to do that prior.” That is great news for the taxpayer but somewhat less good news for the entrepreneurs among the prison population. It means they are once again back to the meager hourly wages they were earning before discovering the joys of tax fraud.

CHRISTOPHER BRAUCHLI can be emailed at brauchli.56@post.harvard.edu.

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