Wednesday, February 16, 2011

Prisoners stole millions from the IRS in 2009

The IRS issued $39.1 million in undeserved federal tax refunds to jail and prison inmates, according to data.

Seemingly proving the adage that crime pays, even behind bars, prisoners in the three states received nearly $19 million in IRS refunds during 2009 after filing false or fraudulent tax returns, according to an IRS report to Congress that was included in a federal audit released in January.

The IRS said it could not immediately determine how much, if any, of the fraudulent refunds in 2009 has been recovered, because the recapture process "can take several years."

The actual amount stolen by inmates could be even higher: The audit concluded the IRS doesn't always conduct fraud screening on tax returns filed by prisoners.

Although inmates' prison jobs don't pay enough to trigger tax withholding, some prisoners and their families may legally receive income from investments, inheritances or other sources that can qualify them for legitimate tax refunds. Washington enacted legislation in 2008 intended to crack down on fraudulent tax refunds claimed by inmates, but the intended enforcement has been bogged down by legal questions.

"If the IRS does not take action, the problem will only worsen and more taxpayer dollars will be lost," said J. Russell George, the Treasury Department inspector general for tax administration, whose office conducted the audit.

George added that "prisoners continue to find new ways to exploit weaknesses in the system in order to receive refunds to which they are not entitled." Underscoring that warning, a second inspector general audit issued Feb. 3 found that 29 inmates received nearly $50,000 in federal tax credits for electric and alternative motor vehicles they falsely claimed in tax returns.

The IRS "takes refund fraud seriously," and has instituted programs that stop "the vast majority of refunds from fraudulently going to inmates," said Michelle Eldridge, the agency's chief national spokeswoman, who added "we continue to increase our efforts."

But so do inmates seeking refunds for jobs they never held, and taxes that weren't withheld.

California, Florida and Georgia may lead the trend because they have large state prison populations, the IRS said. The three states ranked second, third and fifth, respectively, in a 2010 inmate count by the Pew Center on the States, a non-profit that identifies state policy solutions.

Evidence in federal court cases indicates they're typically run by inmates who gain access to the Social Security numbers and identifying information of others — sometimes including fellow prisoners — and then use the data to file false tax returns that generate thousands of dollars in refunds.

In some cases, the inmates search the Internet for listings of businesses that have filed for bankruptcy. Listing a defunct firm as employer on a false tax return can make it difficult for the IRS to verify the claim.

The scams often involve inmates' relatives or friends who are not behind bars. They receive and cash IRS refund checks, then deposit funds in prison accounts.

Danilo Suarez, 50, a Florida convict who has served time for drug possession and other charges, scammed at least $58,022 in IRS refunds by filing 14 or more false tax returns that listed addresses for his daughter, sister and other relatives, federal court records show.

Suarez pleaded guilty last year, and was sentenced Jan. 14 to an additional five-year prison term, plus restitution of the full amount stolen from the IRS. His attorney, Stewart Abrams, did not respond to messages seeking comment on the case. Suarez's daughter and sister each were sentenced to six months behind bars for related convictions.

Court records show the scam ultimately involved multiple prisoners and tens of thousands of dollars in fraudulent refunds. Suarez was caught in part because an alert official at a Key West bank spotted an upside-down notary stamp on a power-of-attorney form Suarez's daughter used in an effort to cash a tax refund check in early 2007.

Separately, officials at the Monroe County Detention Center in Key West found instructions in a prisoner's cell describing how to file false tax returns.

The discoveries led to a joint investigation by Key West police and federal authorities, including the FBI and the IRS. The probe also led to charges against Shawn Clarke, 38, an inmate who had been sentenced to a five-year term for battery.

In a deal with prosecutors, Clarke pleaded guilty last year to conspiracy to file false claims. He was sentenced in September to 51 months in prison. Clarke was also ordered to pay $40,345 in restitution for his role in the refund scam, which, like the Suarez case, involved help from relatives outside the jail.

In a separate criminal information filed last month in Tennessee, Jeanni Renee Hillin was accused of receiving $58,651 in refunds for false tax returns filed in 2006 as part of a conspiracy with a state prison inmate the court filing identified only as W.J.

The inmate allegedly sent Hillin tax returns that included Social Security numbers from fellow prisoners and other inmates recruited at other Tennessee state prisons, the complaint charged. Hillin pleaded not guilty at her arraignment last week.

Hoping to improve government detection of similar frauds, Congress in 2008 gave the IRS authority to disclose prisoners' tax information to state departments of corrections and the Federal Bureau of Prisons. The new statute carved an exemption in federal laws that in most cases bar the IRS from sharing such data.

The intended information-sharing had not started as of October, because the IRS and Department of Justice were investigating whether prison officials could legally disclose the IRS data to inmates and their attorneys, the audit found.

Asked by USA TODAY about any change since October, the tax agency said it signed a memorandum of understanding with the federal prison system this month. The IRS said Commissioner Douglas Shulman on Monday wrote to governors of the 10 states with the highest numbers of fraudulent tax returns filed by prisoners. Shulman asked the states to help improve data they currently give the IRS on their inmate populations. The letters also sought approval of agreements that would allow the IRS to share information about fraudulent tax activity by prisoners, thus enabling the states "to take appropriate disciplinary actions."

Along with the delay, the inspector general audit found that the IRS does not check all tax returns filed by prisoners. The tax agency identified 44,944 false or fraudulent tax returns filed by prisoners in 2009, but the audit identified 54,410 tax returns it said the IRS failed to identify as having been filed by prisoners.

Commissioner Douglas Shulman says the IRS wants agreements with states to share information about fraudulent tax activity by prisoners.
"As such, these individuals would not be subjected to the specialized fraud checks the IRS has developed for prisoner-filed tax returns and, therefore, may never be identified as a false/fraudulent prisoner tax return," the audit concluded.

Disputing that finding, the IRS said most of the tax returns identified by the audit had been checked. As tax returns are screened by the agency's Electronic Fraud Detection System, the IRS checks for matches with identifying data supplied by the federal and state prison systems.

When a prisoner filing is identified, the IRS gives it a special indicator. The specially marked tax returns then are evaluated, the IRS said.

The inspector auditors recommended more stringent safeguards, a proposal met with partial agreement from Victor Song, the IRS' criminal investigation chief.

The screening issue is complicated, the IRS cautioned, because legitimate tax refunds filed by inmates are mixed with the many fraudulent applications. Additionally, the prisoner population constantly changes, making it difficult for the IRS to maintain a complete and accurate database of the inmate population.

Under a Treasury Department proposal issued Monday as part of the federal budget process, by Dec. 1 of each year all U.S. prisons would be required to give the IRS all names and Social Security numbers of inmates serving terms at least one year.

State prison officials say they already cooperate with the tax agency, and several said they look forward to increased, two-way information sharing. Inmates who filed false returns might face jail sanctions, apart from any criminal charges.

David Folsom, deputy inspector general of Florida's corrections department, said the state is currently helping investigate two suspected cases of prisoner tax refund fraud.

"It's almost like a little bit of a dance where we provide information, but we aren't told (by the IRS) how it fits into the investigation. It's been a little frustrating," Folsom said.

The IRS said it can't share full investigation details until an indictment has been issued.

"Unfortunately, in some cases silence has been misunderstood as inaction on the part of the IRS," Eldridge said. "We understand the frustration caused when prison officials provide information and then cannot get updates or other information from the IRS, but federal law clearly prohibits IRS from disclosing on-going case information."

Voicing hope the information-sharing envisioned by Congress begins to flow, Folsom said, "we'd like to be more involved and help speed up these investigations."

But not all states necessarily share that view.

Cassandra Hockenson, an information officer for the California Department of Corrections and Rehabilitation, said the agency likely would defer to the IRS' better funding and expertise in investigating tax frauds.

"We do not have anything to do with them (prisoners) filing their tax returns," Hockenson said. "The IRS is the collection arm of the federal government. If they ask us for any information, we're more than happy to comply."

Kevin McCoy, USA TODAY

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