The IRS says that the goal of a criminal IRS investigation is to get convictions or guilty pleas. That means prison time. I’ve often wondered how much in tax dollars we taxpayers are probably paying to send tax offenders to jail. So I did something that’s common in a tax matter—a little math.
IRS Convictions and Sentences
The IRS loves to brag about its conviction rate – and subsequent prison sentences. In fiscal year 2012 alone, the IRS handed down 3,390 criminal indictments, earning 2,634 convictions – a hefty 78% conviction rate – and sentenced almost 94% of those convicted to some form of confinement. Of those convicted, 81.5% actually went to federal prison – that’s more than 4 out of 5 people convicted.
The IRS alleges that these sentences are intended to create a deterrent effect . . . but the number of prosecutions for alleged tax crimes has actually increased in recent years. Sentence lengths over the same period have jumped from an average of 18 months to 25 months, leading one to wonder if the IRS’s efforts are aimed more at showy punishment than true deterrence.
Funding the Prison Complex
So, let’s look at the Federal prison system in which these generally non-violent individuals are locked up.
The Federal Bureau of Prison’s budget in fiscal year 2012 was $6.83 billion. In fiscal year 2013, the budget rose to over $6.9 billion dollars. In 2010, the annual average cost of housing a Federal prisoner was $26,480. We taxpayers spend a lot of money to fund the prison complex. In fact, the United States has the highest incarceration rate in the world. Granted, there are some individuals who should be in prison. Few would argue against incarcerating violent serial killers like Jeffrey Dahmer, given the danger they present to everyone. But people convicted of tax crimes? Is it really necessary to incarcerate so many people for offenses committed with calculators and spreadsheets? One has to wonder about some of the people in this country who end up in prison, and what ends imprisoning these people serve.
Cost of Incarcerating Individuals for Tax Crimes
The IRS brags about many things – except, of course, the amount of money the IRS spends to investigate, prosecute, and incarcerate those who plead guilty or are convicted of tax crimes. So, I had to make some assumptions and a few guesses in order to come up with an estimated cost.
As previously noted, the average annual cost of housing a Federal prisoner is about $26,500 a year. The average sentence for a tax crime is 2 years. Therefore, each individual incarcerated for a tax crime probably costs the taxpaying public roughly $53,000. In FY 2012 alone, 2,010 individuals sentenced for tax crimes were sent to Federal prisons. If you do the math, you can see that the cost to American tax payers of imprisoning just this one group of prisoners, added into the prison system each year, is roughly $106,530,000. That’s one-tenth of a billion dollars to incarcerate – for just one year – a group of people which wouldn’t take up half the visitors section of any Texas high-school football stadium. And that’s not a one-time cost to taxpayers, of course – there will be a fresh crop of people branded as tax criminals next year, and the year after that, and the year after that – because the IRS is serious about, and proud of, sending people to prison. But is this the prison population on which we really need to spend our tax dollars?
Here are two things to consider.
The first is that tax crimes are financial crimes, not violent crimes. The very essence of tax crime is that its perpetrators either don’t pay the government the amount of money they owe, or – if acting as tax preparers or advisers – they enable others to avoid paying the government the money they owe. So, if money was stolen, then money should be returned/replaced.
The second thing to consider is how best to make that happen. People convicted of tax crimes typically already have jobs. Many of them are professionals with great potential to earn taxable income. Unlike some other types of convicted individuals, tax criminals are usually readily employable, and are exactly the sort of individuals who not only can but should make restitution, as opposed to serving prison sentences which cost taxpayers money better spent on other prison populations. It’s almost as if the IRS, in its aggressive pursuit of convictions and prison sentences for tax criminals, is saying to each and every honest American taxpayer, “Our reward to you, for paying your taxes . . . is to spend your tax dollars locking up people who don’t pay their taxes.” So why not just make them pay their taxes, like you do?
A lot of innocent people are pursued for tax crimes (itself an entirely different problem, and a subject for another post, another time). And of course, there are a lot of people who are guilty of tax crimes. Regardless of innocence or guilt, though, most imprisonment is not a cost-effective solution to tax crime.
There could be and should be a much better system. A person not in prison is a person who can hold a job. A person with a job can pay his or her taxes. A convicted tax criminal not in prison is a tax criminal who can make restitution. Imprisoning tax criminals creates a double drain on the Federal budget – taxpayers pay for their upkeep, and otherwise-employable prisoners are prevented from paying their own taxes (and paying back the money they owe the government). The IRS – if it were more concerned with tax revenue, and less with crowing to the press – could reduce the burden on taxpayers by collecting more money from alleged tax cheats and asking for less from the rest of us.
 http://www.irs.gov/uac/Enforcement-Statistics-Criminal-Investigation-%28CI%29-Enforcement-Strategy. And while the IRS loves to issue press releases about taking down the high-profile ringleaders of multimillion-dollar nationwide tax schemes, they don’t keep statistics showing how many of the people they convict and sentence to prison are just small-time operators whose criminal tax liability may be no greater than the ordinary tax liability of your average American taxpayer.
 U.S. Dep’t of Justice, Federal Prison System (BOP) FY 2013 Budget and Performance Summary (2012).
 U.S. Gov’t Accountability Office, Bureau of Prisons: Eligibility and Capacity Impact Use of Flexibilities to Reduce Inmates’ Time in Prison, 19 fig. 3 (2012). This figure is an extrapolation of the average per-day cost per inmate across all facilities – minimum-security ($57.55), low-security ($69.53), medium-security ($71.91), and high-security ($92.96) – and also incorporates daily costs for community corrections measures such as halfway houses and home detention ($70.79).
 Of course, it’s probable that some tax prisoners have their sentence lengths reduced for good behavior, but statistics on such are not available from the IRS.
 Though it should be noted here that convicting any and all tax crimes as felonies makes those convicted of such felons – significantly impacting their ability to get the sorts of jobs which would enable them to make restitution.