As actor Wesley Snipes prepares to serve a three-year jail sentence for failing to file income tax returns, the government is gearing up to potentially pore over any tax returns he may file while he's in prison too. In fact, the feds will be more closely scrutinizing not just Snipes' tax returns, but also the tax returns of many U.S. prisoners if the Treasury Inspector General for Tax Administration (TIGTA) has its way.

TIGTA is recommending that the Internal Revenue Service (IRS) step up its monitoring of prisoners' tax filings in an effort to prevent fraudulent returns and fraudulent refunds. The IRS is already combating such fraud, which officials say has recently exploded. According to a recently-released audit report from TIGTA, the IRS identified 249,185 fraudulent tax returns and prevented the issuance of $1.48 billion in fraudulent refunds during the 2010 tax-filing season. That represented a whopping 50% increase over the number of fraudulent tax returns identified during the 2009 filing season, the report found.

However, the report also concluded that the tax returns of individuals deemed "most likely" to engage in fraud are seldom screened by the IRS. TIGTA's analysis found that the majority of tax returns the IRS identifies as being filed by prisoners are not being screened to assess their fraud potential.Specifically, TIGTA says that 253,929, or 88%, of the 287,918 returns filed by prisoners as of March 24, 2010 were not selected for screening. Of those, 48,887 who claimed refunds totaling more than $130 million had no wage information reported to the IRS by employers. As a result, TIGTA wants the IRS to take its screening efforts to the next level – going after prisoners who may be hitting up the government for fraudulent tax refund checks.


TIGTA says that with better access to wage and withholding information, the IRS could catch and prevent more tax fraud. "While the IRS is identifying larger numbers of fraudulent returns, improvements must be made to its screening processes to ensure that returns filed by prisoners get adequate scrutiny," said J. Russell George, the Treasury Inspector General for Tax Administration. "Unscrupulous individuals, including prisoners, continue to submit tax returns with false income documents to the IRS for the sole purpose of receiving a fraudulent refund," he added.

Under current law, the IRS has limited access to wage information submitted by federal agencies and state workforce agencies to the Department of Health and Human Services (HHS). Only individuals claiming the Earned Income Tax Credit have their wage information submitted to the IRS. In addition, the IRS could benefit from expediting the use of wage and withholding information it receives from the Social Security Administration (SSA), the TIGTA report suggested.

TIGTA made several recommendations to the IRS:
-seeking increased access to HHS data, which would be done via legislative changes
-verifying whether the 48,887 tax returns with tax refunds that were filed by prisoners with no reported wages were fraudulent
-identifying revisions that could be made data systems to better identify fraudulent tax returns filed by prisoners
-expediting the use of Social Security Administration data

Interestingly, the IRS isn't fully on board with TIGTA's recommendations. While it agreed with most of TIGTA's suggestions, the IRS disagreed with the amount of potential savings from expanded and expedited access to SSA data and improving verification of prisoner tax returns. So officials are trying to decide the best, most cost-effective ways to handle those areas.

This isn't the first-time that TIGTA has recommended a crackdown of prisoner tax returns. Five years ago, based on a September 2005 audit, TIGTA also produced a report concluding that the the Internal Revenue Service needs to do more to stop the millions of dollars in fraudulent refunds paid to prisoners.

Either way, the hand-writing is on the wall and the message is clear: If you're locked up, don't try filing a bogus income tax return. It just might cost you even more time in the slammer.

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Lynnette Khalfani-Cox, an award-winning financial news journalist and former Wall Street Journal reporter for CNBC, has been featured in the Washington Post, USA Today, and the New York Times, as well as magazines ranging from Essence and Redbook to Black Enterprise and Smart Money. Check out her New York Times best seller 'Zero Debt: The Ultimate Guide to Financial Freedom.'