Inmate Tax Refund Scams On the Rise
The prisoners found to be filing false refunds avoid prosecution from state and federal officials since they are already behind bars, according to the Arizona Star. Criminal prosecution offers little payoff to authorities and its difficult to prove that any prisoner is actually the one who filed the return.
The Arizona Republic reports that if convicted, the inmates filing false returns would receive sentences of less than two years. Also prison officials often do not pursue disciplinary sanctions against inmates, such as loss of visitation privileges, or transfer, because they do not want to interfere with the IRS’ criminal investigations.
Brad Palmer, an IRS agent in Arizona, told the Arizona Republic, “Usually in tax fraud cases, we know who did it and we know how to prove the crime. Here, we know the crime but we don’t know who did it.”
Patrick Schneider, U.S. Attorney’s Office chief of criminal prosecutions in Arizona, told the Arizona Star, “We just don’t have the manpower to do every fraud case we would do otherwise.” State prosecutors will not prosecute these cases for the same reason. Arizona convicts are responsible for about half of the $600,000 in faked state claims, according to the Arizona Department of Revenue.
Only one prisoner has been convicted for this scam in Arizona during the past two years. Daniel G. Johnson is a 28 year man currently serving a 2.5 year sentence for forgery. The Arizona Republic reports that possibly the only reason he was caught and charged was the size of his refund request on gambling winnings for $207,686. He admitted his guilt as part of a plea agreement and may receive an additional five years on his initial sentence he is currently serving.
The scam works relatively simply. An inmate obtains IRS forms using the Internet, or from the prison library, completes the forms claiming overpayment of taxes or seeking rebates, then sends the false return to an intermediary, outside of the prison, who sends the return onto the IRS.
If the refund request is processed, the intermediary receives the false refund. The intermediary takes his cut of the false refund and then passes the remaining portion back to the inmate.
KVOA reports that chief of IRS criminal investigations Nancy Jardini told a House subcommittee examining this problem that inmate fraud has increased 700 percent in three years. She said in the Arizona Republic, “There is no question that prisoner refund fraud is on the rise. Even though prisoner returns comprised less than 1 percent of all individual federal income tax returns filed in 2004, more than 15 percent of false refund returns used prisoner names and taxpayer identification numbers.”
To help combat false refund returns, prison inmate rosters are provided to tax officials so that returns can be flagged in databases. The Arizona Republic reports both processors and computer systems are programmed to detect these names and addresses, as well as scam techniques.
Action is taken when prison officials learn of a scam. Inmates are interviewed and cell searches are conducted where contraband items such as photocopied tax forms, lists of Social Security numbers, or even cash are found. The Arizona Republic reports other investigative work sometimes finds unreasonably large deposits of cash entering inmate accounts.
If proper evidence is found, the IRS is notified, but the IRS is banned from disclosing taxpayer information, even to prison investigators. When prisoners are caught, the collection of the false refunds is blocked, but the IRS cannot reveal details to prison officials, although this may change with a new informal proposal allowing IRS agents to disclose criminal information to prison officials.
But the situation continues. Joe Profiri, an Arizona Department of Corrections criminal investigations manager, said in the Arizona Republic, “If you’re going to steal and get away with it, you continue to steal.” Palmer added, “It’s a problem. I’m not going to sit here and deny that there’s a hole in the system.”