Adventures in Taxland, Part III

I recently had a client who had received a letter from the IRS regarding her 2011 tax return. The gist of the letter was that the IRS had received information that the person associated with social security number xxx-xx-xxxx, claimed as a dependent on my client’s return, had earned more than $3700 in 2011. Exceeding that income threshold had made the person ineligible to be claimed as a dependent. The letter asked the client to verify whether this was true of not. If true, she would have to amend her 2011 return.


Me: “Who did you claim as a dependent?”
Client: “My brother. He must have had a job I didn’t know about for a few months.”
Me: “Why don’t you ask him?”
Client: “He’s in prison. He wouldn’t know how much he made before he went in.”
Me: When did he go to prison?”
Client: “I’m not real sure. It was early in 2011. He would have only worked a couple of months before he went in.”
Me: “So your brother was in prison for most of 2011, but you still claimed him as a dependent? Maybe he was working in the prison laundry, or was stamping out license plates. Those guys get paid something for that, even if it is prison wages.”
Client: “After I paid for all those collect calls, and bought him all that stuff he asked for, I figured I needed to get something back for all the money I spent. If he was working, he should have bought his own stuff.”
Me: “Let’s get started amending your return. You’ll have to pay back part of your refund from 2011. I’ll print out a payment voucher you can use to send with the money.”

After I finished amending the client’s 2011 return, I started thinking about prison wages, so I looked it up. In my state, prison wages run from $.17 to a little over $.50 an hour, depending on the type of work. You can’t get up to $3700 in annual earnings at those rates. So unless the brother worked a lot of hours before he got sent away, he wasn’t the person working for those wages.

It occurred to me that my client’s brother could have been the victim of identity theft. His social security number could have been sold to an illegal immigrant, who was using it to hold down a job. Until he gets out, he would have no way of knowing, nor would the Social Security Administration, because only one person would be working under that number. He is actually benefitting, because whoever is using his social security number is building up credits for him to use in retirement (assuming he eventually gets out).

It further occurs to me that such a scheme could be run on a large scale, providing a funding source for organized crime. On the macro level, I wonder what a cross check of prisoners with social security payers would reveal.

On the micro level, I wouldn’t want to go back to the IRS and claim that the earnings reported couldn’t be associated with my brother, because he was in jail the whole time. They would probably take a dim view of that explanation. So identity theft or no, I’m glad we amended the client’s return for 2011.

When we did her return for 2012, she filed as single, no dependents.