[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
TO EXAMINE TAX FRAUD COMMITTED BY PRISON INMATES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 29, 2005
__________
Serial No. 109-36
__________
Printed for the use of the Committee on Ways and Means
______
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
E. CLAY SHAW, JR., Florida CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri LLOYD DOGGETT, Texas
RON LEWIS, Kentucky EARL POMEROY, North Dakota
MARK FOLEY, Florida STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
SUBCOMMITTEE ON OVERSIGHT
JIM RAMSTAD, Minnesota, Chairman
ERIC CANTOR, Virginia JOHN LEWIS, Georgia
BOB BEAUPREZ, Colorado EARL POMEROY, North Dakota
JOHN LINDER, Georgia MICHAEL R. MCNULTY, New York
E. CLAY SHAW, JR., Florida JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas CHARLES B. RANGEL, New York
DEVIN NUNES, California
J.D. HAYWORTH, Arizona
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C O N T E N T S
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Page
Advisory of June 22, 2005, announcing the hearing................ 2
WITNESSES
Davis, Hon. Jim, a Representative in Congress from the State of
Florida........................................................ 6
Keller, Hon. Ric, a Representative in Congress from the State of
Florida........................................................ 8
Feeney, Hon. Tom, a Representative in Congress from the State of
Florida........................................................ 9
______
Doe, John, Inmate, South Carolina Department of Corrections...... 16
______
IRS, Nancy J. Jardini, Chief, Criminal Investigations............ 27
U.S. Department of the Treasury, Hon. J. Russell George, Treasury
Inspector General for Tax Administration....................... 35
Texas Department of Criminal Justice, John M. Moriarty........... 42
South Carolina Department of Corrections, Jeff Bentley........... 45
SUBMISSIONS FOR THE RECORD
Payne, Cynthia, Largo, FL, statement............................. 61
Ryesky, Kenneth, East Northport, NY, statement................... 62
TO EXAMINE TAX FRAUD COMMITTED BY PRISON INMATES
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WEDNESDAY, JUNE 29, 2005
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:05 p.m., in
room 1100, Longworth House Office Building, Hon. Jim Ramstad
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
June 22, 2005
No. OV-3
Ramstad Announces Hearing to Examine
Tax Fraud Committed by Prison Inmates
Congressman Jim Ramstad (R-MN), Chairman, Subcommittee on Oversight
of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing to examine tax fraud committed by
prison inmates. The hearing will take place on Wednesday, June 29,
2005, in the main Committee hearing room, 1100 Longworth House Office
Building, beginning at 2:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. Invited
witnesses will include Members of Congress, and witnesses representing
the Internal Revenue Service (IRS), the Treasury Inspector General for
Tax Administration, State correctional systems and a prison inmate who
committed this tax fraud for approximately a decade.
BACKGROUND:
While the vast majority of Americans pay their taxes with honesty
and integrity, a small minority is responsible for large amounts of
refund fraud. The IRS estimates there is a total of approximately $375
million lost to refund fraud each year, and remarkably, prison inmates
are contributing to the problem from behind bars. The IRS estimates
that 7.5 to 15 percent of all refund tax fraud is being committed by
prison inmates. Furthermore, it appears that this problem is growing
rapidly. Prisoners nationwide have developed elaborate schemes to
receive refunds by fraudulently reporting earnings or claiming false
eligibility for tax credits. Each year, prisoners are devising new
methods to defraud the tax system, at the expense of American
taxpayers.
The IRS has some procedures meant to detect and stop tax fraud by
prison inmates, including maintaining a database of individuals who
have been in prison within the last two-and-a-half years. According to
IRS data, during 2004, individuals listed in the IRS prisoner database
filed 455,097 returns, seeking $758 million in refunds. The IRS
successfully identified 18,159 (4 percent) of these returns as
fraudulent, but only stopped 14,033 (77 percent) of the refunds, worth
$53 million, from being issued. The hearing will examine IRS efforts to
combat inmate tax fraud and consider improvements that could be made.
In addition, the Subcommittee will hear about the efforts of State
correctional systems to combat this fraud.
In announcing the hearing, Chairman Ramstad stated, ``Tax fraud in
any form is unacceptable. It is especially troubling when prison
inmates are able to game the system from behind bars. We must find ways
to stop this outrageous behavior.''
FOCUS OF THE HEARING:
The hearing will focus on the current laws, policies and procedures
to detect and deter tax fraud committed by prison inmates, and will
explore further steps that can be taken by the IRS or Congress to
eliminate this fraud.
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Chairman RAMSTAD. The hearing will come to order. Tax fraud
in any form is unacceptable and illegal, but it is particularly
outrageous when it is committed by prison inmates while still
behind bars. Increasingly, it seems that instead of repaying
their debt to society many prison inmates are actually
profiting at the expense of American taxpayers. Refund fraud by
prison inmates is a significant problem that is growing
dramatically each year. The IRS (IRS) estimates that tax refund
fraud by prison inmates accounts for as much as 15 percent of
all tax refund fraud. The fraud is growing as word spreads
among inmates how easy this scam is and how unlikely it is that
inmates will be caught or punished. Prisoners nationwide have
developed elaborate schemes to get refunds by fraudulently
reporting earnings or claiming false eligibility for tax
credits. There are several basic steps in this kind of fraud.
It typically starts with a prison inmate who has little to lose
and is already serving a lengthy sentence. The inmate then
acquires access to tax forms. The prisoner subsequently makes
up phony income and withholding and claims to be entitled to a
large refund. Then the prisoner either mails the forms to the
IRS or gets help from someone on the outside to put them in the
mail.
This fraud is simple, and unfortunately, effective. I have
here 6 fraudulent tax forms filled out by a group of prison
inmates in Florida. These inmates would have profited over
$29,000 if these returns had been mailed as intended. These
inmates in Florida prepared over 20 returns that they were
planning to file this year. Now, this represents just one group
of inmates at one State prison. There is evidence the problem
of tax fraud by inmates is quite widespread. Now, the IRS does
have procedures in place designed to stop inmate tax fraud. We
will hear today that last year the IRS stopped over 14,000
refunds from going to inmates who had prepared fraudulent
returns. That is a good start, but as today's hearing will make
clear, we have a long way to go. One witness comprising the
second panel today, a prison inmate, will tell us how common
and easy this scam is. This one inmate has defrauded the U.S.
Government of several million dollars--that is million with an
``M''--over the years by filing between 600 and 700 fraudulent
returns and getting refunds 90 percent of the time. We will
also hear testimony from State prison officials who have been
on the frontlines of combating tax fraud inside prisons. While
these officials have made strides, they are hindered by the
IRS' inability to share information on these cases.I look
forward to the witnesses' testimony and to discussing how we
can stop this outrageous tax fraud by prison inmates.I now
recognize the distinguished Ranking Member and my good friend
from Georgia, Mr. Lewis, for his opening statement.
[The prepared statement of Chairman Ramstad follows:]
Opening Statement of The Honorable Jim Ramstad, Chairman, and a
Representative in Congress from the State of Minnesota
Tax fraud in any form is unacceptable and illegal. But it is
particularly outrageous when it is committed by prison inmates while
they are behind bars. Increasingly, it seems that instead of repaying
their debt to society, many prison inmates are actually profiting at
the expense of American taxpayers.
Refund fraud by prison inmates is a significant problem that is
growing dramatically each year. The IRS estimates that tax fraud by
prison inmates accounts for 15 percent of all tax refund fraud. The
fraud is growing as word spreads among inmates how easy this scam is
and how unlikely it is that inmates will be caught or punished.
There are several basic steps in this type of fraud. It typically
starts with a prison inmate who has little to lose and is already
serving a lengthy sentence. The inmate next needs access to tax forms.
The prisoner makes up phony income and withholding, and claims to be
entitled to a large refund. He either mails the forms into the IRS
himself, or gets help from someone on the outside. This fraud is simple
and unfortunately, effective.
I am holding 6 fraudulent tax forms filled out by a group of prison
inmates in Florida. These inmates would have profited over $29,000 if
these returns had been mailed as intended. These inmates prepared over
20 returns they were planning to file this year. This represents just
one group of inmates at one prison. There is evidence the problem of
tax fraud by inmates is widespread.
The IRS does have procedures in place designed to stop inmate tax
fraud. We will hear that last year, the IRS stopped over 14,000 refunds
from going to inmates who prepared fraudulent returns. That's a good
start, but as this hearing will make clear, we have a long way to go.
One witness--a prison inmate--will tell us how common and easy this
scam is. This one inmate has defrauded the U.S. government of several
million dollars over the years, and he is not alone.
We will also hear testimony from state prison officials who have
been on the front lines of combating tax fraud inside prisons. While
these officials have made great strides, they are hindered by the IRS'
inability to share information on these cases.
I look forward to the witnesses' testimony and to discussing how we
can stop this outrageous tax fraud by prison inmates.
I now recognize the distinguished ranking member from Georgia, my
good friend, Mr. Lewis, for his opening statement.
Mr. LEWIS. Thank you very much, Mr. Chairman, my friend and
my colleague, and on this Committee as Chair and Ranking
Member, I think we tend to refer to each other from time to
time as brothers. Today's hearing will focus on tax refund
fraud committed by individuals in prison. Recent news reports
indicate that some inmates have been able to scam our tax
system by filing fraudulent tax returns with the IRS for the
purpose of attaining tax refunds. Apparently millions of tax
dollars are at stake and the number of fraud cases have
continued to increase in recent years. It seems that there are
two key questions to ask in addressing the situation. Can the
IRS stop payment on bogus tax refund claims in a timely and
effective manner? Are the IRS, State law enforcement agents,
prison officials and others coordinating their efforts to
address this situation?
The witnesses will provide us with important information
about how this illegal activity is able to occur and what steps
need to be taken to better enforce the law. Mr. Chairman, I
applaud you for scheduling this hearing. I look forward to a
most informative hearing and follow up as is needed. I want to
welcome our colleagues from Florida on the first panel who know
this issue well, following news reports involving Florida
prisons. I must apologize, Mr. Chairman. I left my glasses over
in the Capitol, and I do not think I can see all of you, but
thank you very much.
[The prepared statement of Mr. Lewis follows:]
Opening Statement of The Honorable John Lewis, a Representative in
Congress from the State of Georgia
Today's hearing will focus on tax refund fraud committed by
individuals in prison. Recent news reports indicate that some inmates
have been able to scam our tax system by filing fraudulent tax returns
with the Internal Revenue Service (IRS) for the purpose of obtaining
tax refunds.
Apparently, millions of tax dollars are at stake and the number of
fraud cases has continued to increase in recent years. It seems that
there are two key questions to ask in addressing the situation: Can the
IRS stop payment on bogus tax refunds claims in a timely and effective
manner? Are the IRS, state law enforcement agencies, prison officials,
and others coordinating their efforts to address the situation?
Witnesses will provide us with important information about how this
illegal activity is able to occur and what steps need to be taken to
better enforce the law.
I applaud Subcommittee Chairman Ramstad for scheduling this
hearing. I look forward to a most informative hearing and followup as
is needed. Finally, I want to welcome Members of the Florida Delegation
on the first panel who know this issue well following news reports
involving Florida prisons.
Thank you.
Chairman RAMSTAD. Well, thank you to my friend and
distinguished Ranking Member from Georgia, who has contributed
so much to not only this Subcommittee and the full Committee,
but the Congress. The Chair now would call the first panel
comprising the Honorable Jim Davis from Florida, the Honorable
Ric Keller from Florida, and the Honorable Tom Feeney from
Florida. I want to thank all three of you colleagues for
bringing this matter to our attention. Mr. Davis, please.
STATEMENT OF THE HONORABLE JIM DAVIS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA
Mr. DAVIS. Thank you, Mr. Chairman. Always a pleasure to
work with you, and thanks for the chance to visit your panel
and to be with Congressman Lewis, who I think so highly of as
well. I want to start by acknowledging Congressman Keller for
his leadership on this issue. He initially took the initiative
on this. Congressman Feeney and I have worked with Senator
Nelson from Florida on this. Unfortunately, Florida may be at
the forefront of this problem, and hopefully we will be at the
forefront of the solution as well with your help. As you
mentioned earlier, I think it is important to underscore,
first, this problem is growing, and we do not honestly know how
rapidly it is growing. I am not even sure we know the full
extent of the problem, but we do know that if we do not do
something about it, many, many taxpayers in this country are
going to be cheated because they are paying their taxes.
Certainly in my community folks pay their taxes. They know it
is part of citizenship, and they expect others to pay as well,
and they don't expect people to be cheating the government. We
have had between 1,500 and 18,000 returns that have been
falsified. In the year 2000, best we can tell, there were about
1,500. By 2004, 18,000. This is growing at a rapid rate.
As you mentioned earlier, Mr. Chairman, the good news is
about 80 percent of these fraudulent returns have been
identified. The problem is about $15 million fell through the
cracks and were erroneously refunded to prisoners. In our State
alone, the IRS records show that in the year 2005 about 22,000
returns were filed using prisoners' Social Security numbers,
and upon investigation, about 1,000 of these returns have
results in about $4.6 million in fraudulent tax refunds.
Unfortunately, the response has been slow by the Federal
Government to this problem. Congressman Keller, myself, and I
think others have spoken directly to the IRS Commissioner about
this. We have asked them to fully appreciate the magnitude of
the problem and to identify, to those of us that serve in
Congress, what tools they need to do their job. If we need to
be part of the solution, we need to know that yesterday.
It is not evident to me that the IRS has been as aggressive
about tackling this problem as they should be, and if the
Congress needs to be more aggressive as well, so be it. I am
confident, Mr. Chairman, that in your hands and in the Ranking
Member's hands that there will be prompt action after this
hearing. Part of the problem certainly seems to be the sharing
of information between the State Departments of Correction in
Florida and other States, as well as the IRS. If there are
changes in the law that need to be made to facilitate that, we
certainly should do it. I know that the Congress will be
debating tonight in the House of Representatives a proposed 8-
percent increase, at least an increase that was proposed by the
IRS, of 8 percent in enforcement. We need to be mindful of
exactly what the IRS needs to do their job.
I just want to close by saying that we all recognize that
paying taxes is part of living in our society. It is our job as
Members of Congress to uphold people's sense of confidence and
fairness here. I can't think of a more egregious example than
what you have called this hearing about, and I look forward to
working with you, Mr. Chairman, and Congressman Lewis on a
prompt, effective solution to this problem. Thank you very
much.
[The prepared statement of Mr. Davis follows:]
Statement of The Honorable Jim Davis, a Representative in Congress from
the State of Florida
Mr. Chairman and Members of the Subcommittee,
Thank you for holding this oversight hearing on tax scams committed
by prison inmates. Although I am not a Member of this Committee, I
appreciate the opportunity to participate in this hearing and hope that
we can begin to work on constructive ways to prevent criminals from
collecting unearned wages from the Internal Revenue Service. I would
like to thank Congressman Keller for his determination in pursuing the
illegal tax filing scams in our prisons and pushing for this hearing.
It has come to our attention that prisoners are filing false tax
returns, collecting millions of dollars a year in fraudulent claims.
With the help of a few outsiders, two inmates serving long sentences in
Florida prisons for murder filed fraudulent tax returns and received
refunds of around $5,000 from the IRS for wages they never earned.
Sadly, this is a growing trend. Fraud by prisoners in both state
and federal prison systems is growing at alarming rates. Between 2000
and 2004, false returns increased from about 1,500 to over 18,000. The
good news is that 80 percent of the fraudulent returns were identified
by the IRS and the refunds were stopped in 2004. None the less, nearly
$15 million fell through the cracks and was erroneously refunded to
prisoners by the IRS. We must be sure that the IRS has all available
tools that it needs to prevent these criminals from abusing the system.
In my home state of Florida, there are currently 150,000 prisoners
listed in the IRS's file. IRS records show that, in 2005, approximately
22,000 returns were filed using a prisoner's Florida social security
number. Many of these returns likely are legitimate, such as a married
couple filing joint where one spouse is incarcerated and the other has
full-time wage income. However, the IRS investigated this group and
found that about 1,000 of the returns are fraudulent to the tune of
about $4.6 million.
With very little left to lose, prisoners with long sentences are
taking advantage of a tax system that is currently under review by a
nine-member presidential commission that was created to study tax
reform this past January. Formally known as the Advisory Panel on
Federal Tax Reform, the commission includes former Florida Senator
Connie Mack. With the actions of the Ways and Means Committee in
partnership with the various agencies involved in investigating these
crimes, it is my hope that we can prevent further abuses within the tax
system.
Even more discouraging is the response from the IRS when we
attempted to work hand in hand with them to clarify various instances
of fraud and the poor treatment of those involved in these situations.
Sent on a bureaucratic merry-go-round, we eventually were forced to
call in the Inspector General for answers. It befuddles me that the IRS
refuses to work with the state prison systems as they are the two
players that will find the solution to these fraudulent claims
together.
I urge the Subcommittee to take action to prevent further crimes of
this nature. Mr Chairman, again, I thank you and the Members of this
Subcommittee for the opportunity to address you today and look forward
to working with you on this and many other issues in the future.
Chairman RAMSTAD. The Chair thanks the distinguished Member
from Florida, Mr. Davis, for your testimony. The Chair now
recognizes another distinguished gentleman from Florida, Mr.
Keller.
STATEMENT OF THE HONORABLE RIC KELLER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA
Mr. KELLER. Well, thank you, Mr. Chairman and Members of
the Subcommittee for holding this important hearing today. Let
me begin by telling you how I became aware of this problem. In
November of 2004 WESH News Channel 2, a local TV station in the
Orlando, Florida area, reported disturbing information about
how numerous Florida prisoners received tax refund checks even
though they didn't work or pay income taxes. The WESH
investigation showed that numerous prisoners, including
murderers and rapists, were submitting bogus tax returns to the
IRS, and being rewarded with generous tax refund checks. My
constituents in Central Florida, who work hard and play by the
rules, were understandably upset that their taxpayer dollars
were being wasted on dishonest prisoners who don't work hard
and don't play by the rules. That is why on November 19, 2004,
Congressman Feeney and I wrote to IRS Commissioner Mark Everson
to determine what the IRS is doing to combat this fraudulent
scheme. Since personally meeting with Commissioner Everson and
working with his criminal investigation staff, I have learned
that my initial suspicions are correct: the problem is huge and
it is not limited to Florida.
Last year there were over 18,000 bogus tax returns filed by
prisoners, which could have cost taxpayers over $53 million, if
undetected by the IRS. Fortunately, we are now starting to see
some action to crack down on this problem. Recently, seven
people in Florida were indicted for participating in this
prison refund scam. Three of them were behind bars while
submitting fake tax returns. The others were accomplices on the
outside helping the prisoners. Shockingly, one of the
accomplices was an IRS employee. On February 18, 2005,
Congressman Feeney and I asked this Subcommittee to conduct an
oversight hearing on this problem. We need your expertise to
help the IRS come up with some constructive remedies to prevent
this criminal and fraudulent waste of taxpayer dollars in the
future. For example, it is my understanding that investigators
currently have ``one arm tied behind their back'' because
current law prevents the IRS from sharing tax information about
prisoners with the State Departments of Correction. Perhaps a
very narrow change to this law, along with better enforcement
of existing laws, would go a long way.
I want to again thank the Chairman and Members of the
Subcommittee for holding this hearing. I also want to
especially thank Congressman Jim Davis and Congressman Tom
Feeney for their strong interest and leadership on this issue.
I believe this hearing is an important first step in making
sure the IRS has the tools they need to fight this problem, and
I look forward to working with the Subcommittee to crack down
on this waste of taxpayer dollars.
Thank you.
[The prepared statement of Mr. Keller follows:]
Statement of The Honorable Ric Keller, a Representative in Congress
from the State of Florida
Thank you, Mr. Chairman, and members of the subcommittee, for
holding this important hearing today.
Let me begin by telling you how I became aware of this problem. In
November of 2004, WESH NewsChannel 2, a local television news station
that serves the greater Orlando area, reported disturbing information
about how numerous Florida prisoners received tax refund checks, even
though they didn't work or pay income taxes.
The WESH investigation showed that numerous prisoners, including
murderers and rapists, were submitting bogus tax returns to the IRS,
and being rewarded with generous tax refund checks.
My constituents in Central Florida, who work hard and play by the
rules, are upset that their precious taxpayer dollars are being wasted
on dishonest prisoners who don't work hard and don't play by the rules.
That's why, on November 19, 2004, Congressman Feeney and I wrote to
IRS Commissioner Mark Everson to determine what the IRS is doing to
combat this fraudulent scheme. Since personally meeting with
Commissioner Everson, and working with his Criminal Investigation
staff, I've learned that my suspicions are correct. The problem is
huge, and it's not limited to Florida. Last year, there were over
18,000 false tax returns filed by prisoners, which could have cost
taxpayers over $53 million if undetected by the IRS.
Fortunately, we're now starting to see some action to crack down on
this problem. Recently, seven people in Florida were indicted for
participating in this prison refund scam. Three of them were behind
bars while submitting fake tax returns, the others were accomplices on
the outside helping the prisoners. Shockingly, one of the accomplices
was an IRS employee.
On February 18, 2005, Congressman Feeney and I asked this
subcommittee to conduct an oversight hearing on this problem. We need
your expertise to help the IRS come up with some constructive remedies
to prevent this criminal and fraudulent waste of taxpayer dollars in
the future. For example, it is my understanding that investigators
currently have ``one arm tied behind their back'' because current law
prevents the IRS from sharing tax information about prisoners with the
State Department of Corrections. Perhaps a very narrow change to this
law, along with better enforcement of existing laws, would go a long
way.
I want to again thank the Chairman and the Members of the
subcommittee for holding this hearing. I believe this hearing is an
important first step in making sure the IRS has the tools they need to
fight this problem and I look forward to working with the subcommittee
in cracking down on this waste of taxpayer dollars.
Chairman RAMSTAD. The Chair thanks the distinguished Member
from Florida, and now recognizes the third distinguished Member
of the panel from Florida, Mr. Feeney.
STATEMENT OF THE HONORABLE TOM FEENEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA
Mr. FEENEY. I want to start by thanking Chairman Ramstad,
Ranking Member Lewis and the Members of the Committee for
inviting us to testify here today. Today we are here to discuss
a shocking epidemic of tax fraud that plagues our Nation and
our prison system. Inmates all over the country are filing
false tax returns and collecting real refunds at the expense of
American taxpayers. My colleague, Representative Ric Keller,
and I became aware of this problem as a result, as he
indicated, of a November WESH Channel 2 tax fraud discovery.
Steve Stock was the investigative reporter. We have later been
joined in our efforts by people like Congressman Davis, who I
want to thank, and Senator Nelson as well on the Senate side.
Since we began our investigation we have been in close contact
with the IRS and met directly with Commissioner Mark Everson.
Additionally, we have asked the Committee and the government
Accountability Office (GAO) to examine the matter as
Congressman Keller said.
The full extent to which the prison inmates are committing
tax fraud against American taxpayers far exceeds levels that I
first imagined. Recent figures show that the IRS reports that
as much as 15 percent of all of the tax fraud committed in the
United States is committed by prisoners. These numbers are
staggering, but they only represent the fraud that we have been
able to detect. Prisoners throughout the country are likely
going undetected in their schemes. I would like to offer some
broad suggestions, and in my written testimony I have some
suggestions about principles and ideas to clean up this
horrible mess. In the first place an open dialog of information
sharing and communications between the IRS and State prison
officials is a must. States should be rewarded when they
cooperate with Federal authorities in rooting out fraud.
The Office of the Treasury Inspector General for Tax
Administration has reported to my office that five of the nine
correctional institutions with the highest numbers of prisoners
caught in tax fraud are in Florida. Thus, you have three
Florida Congressmen here today. By no means do I believe that
criminals in Florida are any more ingenious than Federal
criminals through the rest of the country. In fact, I believe
the report actually indicates that it is our prison officials
that have been most cooperative, and if we can get the prison
officers in 49 other States we will get to the bottom of fraud
elsewhere in the country. It is unacceptable that State prisons
receive Federal funding and yet are unwilling to cooperate with
Federal authorities to prevent inmates from defrauding the
Federal Government. The need to share information goes both
ways. Under current Federal law the IRS is unable to share the
identity of convicts who committed fraud with prison officials.
This information could be used by prison officials to monitor
known offenders and discipline prisoners caught in the act.
Finally, I would like to close, again, by thanking
Congressman Davis. Congressman Ric Keller and his staff have
done a tremendous job leading on this issue, and we appreciate,
Chairman Ramstad, your taking the time of the important
Committee on Ways and Means to help us get to the bottom of
this matter.
[The prepared statement of Mr. Feeney follows:]
Statement of The Honorable Tom Feeney, a Representative in Congress
from the State of Florida
Mr. Chairman, Members of the Committee, thank you for inviting us
to testify. I would first like to commend the Committee for its desire
to investigate this troublesome and in my opinion preventable criminal
activity. We are here to discuss an epidemic of criminal tax fraud,
being committed from behind bars, against unsuspecting taxpayers. When
convicted criminals are sent to prison, the American people should be
able to rest assured that the criminal justice system will prevent
these convicts from committing further crimes while they are in
custody.
As members of Congress we are responsible for the stewardship of
the American people's tax dollars. We should fully embrace our role of
oversight into how that money is spent and make every possible effort
to ensure these funds are not wasted or stolen from taxpayers by
criminals who commit tax fraud.
Today, we are here to discuss a particularly egregious form of
fraud. Prison inmates all over the country are filing false tax
returns, and collecting real refunds. There are a number of common
schemes that prisoners use. In one often used scheme, the inmates
submit a fake W2 along with a tax return that qualifies them for a
refund. Then they wait for the government to send a check or make a
direct deposit into their prison bank account. The IRS is aware of this
scheme and others, and it has ideas on how to prevent them, but it
lacks the proper investigative procedures, tools, and information
sharing capabilities to ensure prevention.
I first became aware of this scheme when a local reporter uncovered
it in an investigative report. I would like to give credit where credit
is due. Steven Stock of WESH Channel 2 in Orlando brought to light a
serious problem facing our taxpayers.
It was Mr. Stock's reports that first led my colleague
Representative Ric Keller and me to probe further into the matter
beginning in November of 2004. I applaud Ric and his staff for their
efforts. In April of this year, our coalition expanded to include
Representative Jim Davis and Senator Bill Nelson.
Since we began examining this issue, we have exchanged several
letters with the IRS regarding the matter, Mr. Keller and I met
personally with IRS Commissioner Mark Everson, our staffs have met
directly with IRS Criminal Investigation, and our entire coalition has
requested the GAO look in to this fraudulent activity.
Throughout my investigation, my two primary goals have been to
determine the full extent to which these crimes are being committed and
to identify possible legislative solutions to reduce or prevent this
criminal activity.
Despite some initial difficulties obtaining satisfactory answers to
our concerns, the IRS has lately been corporative with my staff and me
as we examined this issue.
We have come to learn that the scope of this problem is much larger
than previously believed. It appears the coalition's inquires, the
prospect of this hearing, and the additional scrutiny Chairman Ramstad
and the Committee have placed on this matter have brought more clarity
to the facts of the case.
The full extent to which prison inmates are perpetrating tax fraud
against the American taxpayer is astonishing and far exceeds levels I
first imagined when I began looking into this matter. The most recent
figures I have obtained from the IRS report that just over 15% or
18,159 of 118,075 fraudulently filed refund returns detected by the IRS
in filing year 2004 were generated by prisoners. These fraudulent
returns accounted for more than $68 million in detected fraud in filing
year 2004.
These numbers are staggering, but they only represent the fraud
that has been detected. In reality no system can be 100% effective in
detecting all of the fraud that occurs and consequently prisoners
throughout the country are likely going undetected in their schemes. It
would be irresponsible for me to even speculate as to what level of
fraud goes undetected each year, but it is difficult to imagine
criminals engaging in such an activity unless success was a
possibility.
When you consider that the U.S. prison population amounts to less
than 1% of the entire U.S. population, but could be the source of 15%
of tax fraud, these statistics become even more troubling. When a
criminal is incarcerated the American people believe the criminals are
no longer a threat to their safety or their property. In this case that
is not true, and the American people deserve better.
I am confident that the other panelists can speak in more detail
about the best legislative solutions to this problem, but I would like
to offer some broad suggestions and principles to keep in mind when
considering this matter further.
IRS Criminal Investigation is already aware of the schemes
prisoners use to commit tax fraud. The greatest obstacle they face is
having enough information about prisoners to detect the fraud when it
occurs.
An open dialogue of information sharing and communications between
the IRS and state prison officials are essential elements in the effort
to prevent and detect this criminal activity before it occurs. In
states where prison officials cooperate with the IRS, the number of
fraudulent returns detected is higher than states not involved in the
process. States should be rewarded when they cooperate with federal
authorities in rooting out fraud.
The office of the Treasury Inspector General for Tax Administration
(TIGTA) has reported to my office that of the nine prisons or
institutions with the highest number of prisoners caught committing
this type of fraud five are located in Florida. By no means do I
believe criminals in Florida are smarter than criminals elsewhere in
the country. In fact TIGTA informed my office that officials in Florida
cooperate more with the IRS than official in other states.
It is unacceptable that state prisons receive federal funding, yet
some are unwilling to cooperate with the IRS to prevent inmates from
defrauding the federal government. I encourage the committee to explore
ways to encourage or to provide incentives to states to share basic
information about inmates with the federal government. Details about
the identity of inmates, pay roll information about prison employment,
and routing numbers for prison bank accounts could help investigators
identify fraudulent returns.
The need to share information goes both ways. Under current federal
law the IRS is unable to share the identity of convicts committing
fraud with prison officials. IRS Criminal Investigation has reported to
my office that this ability would be useful in their investigations and
their efforts to prevent future fraud. Additionally, if prison
officials were equipped with this information they could use it to
discipline inmates attempting to commit this crime.
Many of these schemes committed by prisoners require the aid of an
accomplice outside of the prison to collect and cash refund checks.
While prisoners often engage in this form of criminal activity without
concern for the consequences because they are already incarcerated,
tougher penalties for coconspirators on the outside could be a useful
deterrent. Informing potential accomplices, such as family members,
friends, and roommates of the potential liability would be useful.
In closing I would like to once again commend this committee for
its willingness to examine this important issue. I encourage you to
take this opportunity to fully examine the extent to which this fraud
is being committed and use the expertise of the other witnesses to
fully examine possible remedies to this problem.
Chairman RAMSTAD. The Chair thanks all three of you for
your testimony here today and for bringing this matter to our
attention, and the Chair would now recognize the distinguished
Ranking Member, Mr. Lewis, to direct questions to the
witnesses.
Mr. LEWIS. Thank you very much, Mr. Chairman, and again, I
want to add my thanks to those of the Chairman in thanking you
for being here today. Congressman Davis, in your testimony you
indicated that the IRS was less than helpful when you attempted
to work hand in hand with them to clarify various instances of
fraud. What should we ask the IRS that would help you
understand the situation and lead to a possible solution in
your State?
Mr. DAVIS. Thank you for the question, Congressman Lewis. I
had a very good conversation with the Commissioner. I think he
personally is very concerned, but I don't think the Agency is
moving quickly enough, and I think, because this is such a
growing problem, that they need to move more quickly. I think
the Committee ought to be looking at whether there needs to be
changes in the law in terms of the ability of the IRS to share
prisoner tax information with the Department of Corrections. If
there is a problem with the Department of Corrections
cooperating, we need to figure out how to work with the
Nation's Governors or whatever Federal laws might affect those
correction facilities. If the IRS claims not to have sufficient
resources to invest in investigation and enforcement, certainly
that ought to be discussed immediately since we are now
debating tonight the Treasury Appropriations Bill.
I would finally say, Congressman Lewis, that if in fact
there is prosecution taking place, that needs to be widely
known to the public because, while there isn't much incentive
to further punish people that are in prison, this operation of
scam takes place with help from people on the outside who
certainly do not want to face criminal charges and
imprisonment. So, I think by you asking the right questions,
hopefully, we can get the system responding more quickly.
Mr. LEWIS. Thank you very much. Congressmen Feeney and
Keller, can you tell us more about the results of your local
television station investigation in Orlando into prisoner tax
refund fraud? How did they go about it? Did it take a
television station to bring it to the attention of the larger
community? Why was someone else not on top of this before a TV
station?
Mr. KELLER. I will take a stab at it, then yield to
Congressman Feeney, but the short answer is, yes, it did take
the television station to bring it to my attention. I had no
idea that this was going on, was shocked when I learned about
it, and was further shocked when I learned how broad the
problem was. Somehow through--in good investigative reporting,
this particular reporter was able, Steven Stock, to develop
sources that I certainly didn't have, and those sources gave
him tips that this was a widespread problem, and he pursued
those, and it turned out that the more bark we pulled off the
tree, the more termites were there. So, yes, that is what got
us moving. Then we got the channels rolling here with respect
to the GAO investigation and asking you to do an oversight
hearing, as well as meeting personally with the IRS
Commissioner. Finally, we see that there is more effort to
crack down on this problem, in large part, frankly, because of
the sunlight that was shone on the problem.
Mr. LEWIS. Thank you.
Mr. FEENEY. Thank you, Congressman Lewis, to my knowledge,
WESH Channel 2 has done at least five different reports on this
matter. The first one is November 16 of last year, where they
located an individual who was on the outside. She was not a
criminal. She had received 10 different tax returns based on
somebody that she knew in the prison system. She felt that was
odd, and they were able to discover that this was a coordinated
conspiracy, where prisoners were teaching one another how to
defraud the IRS. The returns were very much alike. They
identified her only by her first name of ``Cathy,'' and she
indicated that each of the 10 returns asked for a tax refund of
between $4,300 and $5,100. Since then WESH has followed up on
the activities that Congressman Keller and I and others,
including Congressman Davis and Senator Nelson, have engaged
in, but it is sort of interesting.
One of the reasons the IRS has not paid a lot of attention
to this is that most of the fraud amounts are relatively small,
2, 3, 4, 5,000 dollars. The other reason is that there is
actually very little way to deter a murderer, for example, that
is sentenced to 50 years behind bars, in terms of committing
small-time tax fraud. So there are some challenges the IRS
faces, but this came to Congressman Keller's attention and mine
through a local TV station.
Mr. LEWIS. I think one of you suggests that maybe we should
conclude that if this is taking place in Florida, it could be
going on nationwide in other parts of our country.
Mr. FEENEY. I have a theory that every successful con man
in the world eventually makes his or her way through my home
State of Florida.
[Laughter.]
Mr. LEWIS. Well, maybe by the way of Georgia. You have to
go down 75, 95.
Mr. FEENEY. Having said that, I find it hard to believe the
ingenuity of the average Federal prisoner in Florida is much
greater than the statistical average for the rest of the United
States.
Mr. LEWIS. Thank you all very much, thank you. Thank you,
Mr. Chairman.
Chairman RAMSTAD. The Chair would now recognize the
distinguished Subcommittee Member from Florida, Mr. Shaw, for
questions.
Mr. SHAW. Thank you, Mr. Chairman. Very, very briefly,
could you walk us through this a little bit? Is this a
cooperative effort in which they are using each other's
identity? Is this a question of identity theft? How are they
getting the Social Security numbers and matching it up with the
names? There is a lot of questions here that I am not sure that
you all really know, and perhaps the next witness, who himself
is one of the perpetrators, would give further insight, but can
you give us some idea of how all of this happens and why is it
unique to prisons? Ric?
Mr. KELLER. I will take a stab at that, Congressman Shaw.
One of the most common techniques is a prisoner will fill out a
form saying that he doesn't have a W-2 form to attach to the
tax return because his particular business is out of business.
There is an alternative form that you fill out, and it asks you
to estimate what your income is; he sends that in with the fake
tax return and has an address outside of the prison, often an
address of a relative or a friend. It requires an accomplice,
either a relative or a friend, to assist him in getting the
check and cashing the check. In one particular case the
accomplice was a prisoner's mother who was an IRS employee, and
she facilitated that, and now they are both sitting in a
prison. That is one of the techniques. There are many others,
but that is the one that initially came to my attention.
Mr. SHAW. I can understand how somebody might be able to
pull this off if they have somebody on the inside of IRS
working, but to me, to make up a name, no W-2 form, and giving
an estimate--and I assume this is a refund of withholding,
alleged reforming withholding taxes. I guess they are just not
checking it. Is that the case?
Mr. KELLER. Well, as the IRS Commissioner explained it to
me, one of the red flags is when they use one of these
alternative forms, but the challenge he has is that some
prisoners really do have income. Martha Stewart had a massive
income even though she was in prison. Others are submitting
joint returns and they have a spouse on the outside who does
have income, and so there is a bit of a challenge. It is not an
automatic red flag, but that is one of the clues.
Mr. SHAW. God knows, if you don't pay enough estimated,
they certainly can come after you for that. I just don't
understand why they don't check to see what has actually been
paid in under your Social Security number. Anyway, thank you,
and congratulations to all of you, real proud of the work that
you have done. Thank you.
Chairman RAMSTAD. The Chair recognizes the gentleman from
North Dakota, Mr. Pomeroy.
Mr. POMEROY. I thank the Chairman. I will just make a brief
point. First of all, I value very much the information you have
brought to our attention. We will want to play the oversight
role to the fullest in terms of seeing that IRS is responding
to this issue and that we are slamming the door on this one so
that we are not going to have this kind of monkey business in
the future. The point I want to make is that this is a
particularly timely hearing on this topic, a tax fraud scheme
uncovered, but uncovered only after it is all too prevalent, at
the cost of millions to U.S. taxpayers. The IRS has some
significant enforcement challenges. Tax cheats can be found
every corner of this country. Fortunately, the great majority
of people in this country do what they ought to do, and that is
deal honestly with their legal obligation under the Tax Code.
We will have people always trying to find shortcuts and
basically get out of their legal obligation.
In this regard we need enforcement dollars for the IRS, and
that is a budget matter. With the Treasury Postal on the floor,
at this very hour we are considering funding levels for the IRS
that are not what the advisory Committee for the IRS tells us
is required in order to keep this system at the level where it
could provide optimal service to the taxpayer while completely
chasing down those that, in the end, aren't paying what they
ought to be paying. In fact, we earlier received some
information that for every additional dollar in enforcement
there was a substantial return on that commitment of that
revenue. We would get much more back than we would ever spend
out if we would fund the IRS so that it could adequately attend
to these pressing enforcement issues. I guess I don't need a
response from you. I just note the joinder of the issues. We
have under-funding of the IRS. We have tax fraud schemes
abundant in this country. If we do a better job with IRS
funding, we are going to do a better job of cracking down on
these schemes. Thank you, Mr. Chairman. I yield back.
Chairman RAMSTAD. On behalf of the Ranking Member, Mr.
Lewis, and all the other Members of the Subcommittee, the Chair
thanks all three of you for blowing the whistle on this tax
fraud scheme and for your helpful testimony here today. Thank
you very much. Before calling the second panel, the Chair has
an announcement for all the Members of the audience, including
the press and the staff here today. There will be a slight
pause while the hearing room is configured for the anonymous
testimony of the inmate witness. I would like to also read the
statement regarding inmate anonymity. I would like to note that
as I mentioned in my opening statement, we will be having a
prison inmate testifying as a witness comprising the second
panel.
The inmate is current serving time in the South Carolina
Department of Corrections. The South Carolina Department of
Corrections has a policy against inmates appearing on
television in an identifiable manner while they are in prison.
The Department has therefore requested that the inmate testify
anonymously. They have also requested that he appear behind a
screen while testifying so that his image is not broadcast. I
would ask the cooperation of the press and any other person in
the audience to adhere to that policy of anonymity. The inmate
will be testifying, as I said, as the sole Member of the second
panel, and again, I reemphasize to all photographers in the
hearing room, please refrain from taking any pictures of the
inmate as he is brought into and out of the hearing room by the
U.S. Marshals. Thank you.
The Chair would call the second panel. Consistent with the
inmate anonymity policy of the South Carolina Department of
Corrections, the Chair recognizes John Doe, Inmate, South
Carolina Department of Corrections. I want to thank you, sir,
for coming forward, agreeing to testify here today, and I would
remind the witness of the 5-minute rule. I would ask that the
witness deliver his testimony. Please proceed.
STATEMENT OF JOHN DOE, INMATE, SOUTH CAROLINA DEPARTMENT OF
CORRECTIONS
Mr. DOE. To start off with I would like to read the
testimony. Biographical: I am 37-years-old and am currently
serving a 25-year sentence in the South Carolina Department of
Corrections for burglary, grand larceny and arson. I have been
incarcerated since 1987. My total sentence ends in 2007. Upon
completion of my State sentence, I have 60 months of time to
serve in the Federal Bureau of Prisons for tax fraud and bank
fraud.
How I Committed Tax Fraud: In 1991 I saw a television
commercial made by the IRS promoting early filing of tax
returns to avoid the spring tax rush. I decided to file 10
returns using fellow inmates' information just to see what
would happen. The tax forms were readily available at the
institution through the library because they had a prison
industry program where inmates work for minimum wage. All 10
refunds went through. The refunds ranged from $4,200 to $5,400
each. No effort was made to avoid detection. When nothing
happened behind those returns, I started filing every year for
whatever groups of inmates I was friends with. The number
increased each year. I was paid $1,000 for each return I filed.
The remainder of the money belonged to the name of the person
on the return. The first year I bought new shoes, a color TV, a
jam box and lots of drugs. In the last few years, especially
since 2000, the checks were harder to get in. I started having
the checks mailed to outside addresses. Eventually every one
went to the direct deposit system. The money would either be
sent back in small amounts through the inmate's account,
smuggled in through visits in cash, or used by family and
friends on the outside to fund drug rings connected to the
prison system. In most cases now there is no money trail that
can be followed from an inmate's account.
Extent of Fraud: Over the years I have filed 600 to 700
returns. The total dollar amount would be approximately $3.5
million face value. Of all of the returns I have filed,
approximately 90 percent were successful. On some occasions
that I am aware of, some inmates who I filed for owed back
taxes or child support.
How I Got Caught: In 2000, Investigator Bentley at the
McCormick Correctional Institution caught on to my scheme and
confiscated most of the checks coming in. He brought me in and
interviewed me, and I admitted to what I was doing. He said he
was going to contact the IRS and someone would come and talk to
me. I never heard any more from it that year. The following
year I filed returns again. I had a few checks sent to the
institution as a test. These were caught. The others I had
mailed to addresses outside provided by the inmates on their
return. In 2002 an IRS investigator finally came and talked to
me. I confessed again to my scheme. I still filed a few more in
2003 and 2004, but not as much as usual. In 2005 I filed some
because I was threatened by a group of inmates who knew my
reputation. After filing those returns, I forwarded some of the
information in order to have those returns stopped. I have
provided information to Investigator Bentley as lately as this
month.
Extent of Current Fraud Agency Wide: The tax fraud scheme
is larger this year in the South Carolina Department of
Corrections than it has ever been. It has steadily increased
each year, but literally exploded in 2005. All of the maximum
security institutions and many of the medium security
institutions have multiple groups working. The inmates have
learned that it is easy money. If they don't get caught by the
staff making copies of forms or smuggling out the forms, they
are home free.
Where Does the Money Go? I would estimate that 70, 80
percent of all illegal tax refunds are used in the illegal drug
trade. Some is used by addicts to purchase drugs for their own
use. Much is used to fund illegal drug rings to smuggle drugs
into prisons. I don't know that prison gangs, as an
organization or involved in preparing returns, but many Members
are participating. The money and drugs eventually lead to
beatings, stabbings and extortion. With the money I personally
made, I often looked out for poor or indigent inmates who got
no help from home. I donated a significant fund last year to
the Muslim community in order to be in their good graces for
security reasons. Mostly, I purchased and used illegal drugs,
and supplied them for my friends. I am currently drug free and
hope to remain so.
[The prepared statement of Mr. Doe follows:]
Statement of John Doe, Inmate, South Carolina Department of Corrections
BIOGRAPHICAL
I am 37 years old. I am currently serving a 25 year sentence in the
South Carolina Department of Corrections for Burglary, Grand Larceny,
and Arson. I have been incarcerated since 1987. My total sentence ends
in 2007. Upon completion of my State sentence, I have 60 months of time
to serve in the Federal Bureau of Prisons for Tax Fraud and Bank Fraud.
HOW I COMMITTED TAX FRAUD
In 1991, I saw a television commercial made by the Internal Revenue
Service promoting early filing of tax returns to avoid the spring tax
rush. I decided to file ten returns using fellow inmates' information
just to see what would happen. The tax forms were readily available at
that institution through the library because they had a Prison
Industries program where inmates worked for minimum wage. All ten
refunds went through. The refunds ranged from $4200 to $5400 each. No
effort was made to avoid detection. When nothing happened behind those
returns, I started filing every year for whatever group of inmates I
was friends with. The number increased each year. I was paid one
thousand dollars for each return I filed. The remainder of the money
belonged to the name of the person on the return. The first year, I
bought new shoes, a color TV, a jam box and lots of drugs. In the last
few years, especially since 2000, the checks were harder to get in. I
started having the checks mailed to outside addresses. Eventually
everyone went to the direct deposit system. The money would either be
sent back in small amounts to the inmate account system, smuggled in
through visits in cash, or used by family and friends on the outside to
fund drug rings connected to the prison system. In most cases now,
there is no money trail that can be followed from an inmate's account.
EXTENT OF FRAUD
Over the years, I filed six to seven hundred returns. The total
dollar amount would be approximately 3.5 million dollars, face value.
Of all the returns I filed, approximately 90% were successful. On some
occasions that I'm aware of, some inmates who I filed for owed back
taxes or child support.
HOW I GOT CAUGHT
In 2000, Investigator Bentley at McCormick Correctional Institution
caught on to my scheme and confiscated most of the checks coming in. He
brought me in and interviewed me and I admitted to what I was doing. He
said he was going to contact the IRS and someone would come and talk to
me. I never heard any more from it that year. The following year, I
filed returns again. I had a few checks sent to the institution as a
test. Those were caught. The others I had mailed to addresses outside
provided by the inmate on the return. In 2002, an IRS investigator
finally came and talked to me. I confessed again to my scheme. I still
filed a few more in 2003 and 2004 but not as much as usual. In 2005, I
filed some because I was threatened by a group of inmates who knew my
reputation. After filing those returns, I forwarded some of that
information in order to have those returns stopped. I have provided
information to investigator Bentley as lately as this month.
EXTENT OF CURRENT FRAUD AGENCY WIDE
The tax fraud scheme is larger this year in the South Carolina
Department of Corrections than it's ever been. It has steadily
increased each year but literally exploded in 2005. All of the maximum
security institutions and many of the medium security prisons have
multiple groups working. The inmates have learned that it's easy money.
If they don't get caught by the staff making copies of forms or
smuggling out the forms, they are home free.
WHERE THE MONEY GOES
I would estimate that 70-80 % of all illegal tax refunds are used
in the illegal drug trade. Some is used by addicts to purchase drugs
for their own use. Much is used to fund illegal drug rings to smuggle
drugs into prisons. I don't know that prison gangs, as an organization,
are involved in preparing returns but many members are participating.
The money and drugs eventually lead to beatings, stabbings, and
extortion. With the money I personally made, I often looked out for
poor or indigent inmates who got no help from home. I donated a
significant sum last year to the Muslim community in order to be in
their good graces for security reasons. Most of all, I purchased and
used illegal drugs and supplied them for my friends. I am currently
drug free and hope to remain so.
Chairman RAMSTAD. I want to congratulate you on being drug
free. You have been a busy guy in prison, Inmate Doe. You
estimate, if I heard your testimony correctly, that you filed
between 600 and 700 fraudulent tax returns. Is that correct?
Mr. DOE. Yes, sir, That is correct.
Chairman RAMSTAD. That is over a period of how much time?
Mr. DOE. Since 1991.
Chairman RAMSTAD. From 1991 until the present. When was the
last fraudulent tax return that you filed?
Mr. DOE. The last ones I filed were this year,
approximately February.
Chairman RAMSTAD. Following your conviction for tax fraud?
Mr. DOE. Yes, sir, with the--I just got convicted like a
month ago.
Chairman RAMSTAD. I see. Have you filed any returns since
your conviction?
Mr. DOE. No, sir.
Chairman RAMSTAD. The average refund was about $5,000, is
that correct?
Mr. DOE. Between $4,000 and $5,000.
Chairman RAMSTAD. So, it is your testimony that you have
been able to defraud the U.S. Government of $3\1/2\ million
since 1991; is that correct?
Mr. DOE. Yes, sir, That is correct.
Chairman RAMSTAD. You personally profited how much from
each fraudulent return you filed for another inmate?
Mr. DOE. I would charge each inmate $1,000 a piece.
Chairman RAMSTAD. So the total amount you made was about
$600,000, is that right?
Mr. DOE. Approximately $600,000 or $700,000.
Chairman RAMSTAD. You were successful over what percent of
the time? What percent of the fraudulent tax returns were
successful in securing refunds?
Mr. DOE. I would have to say probably 70, 80 percent.
Chairman RAMSTAD. You said 70, 80 percent. So in the 20 to
30 percent of the cases where you weren't successful, where the
IRS stopped you, did anything happen other than the IRS
stopping the check, the refund check?
Mr. DOE. No, sir. They would just stop it, or the
institution would stop it at the mail room and send it to the
investigators in Columbia, South Carolina.
Chairman RAMSTAD. How widespread, in your judgment, is tax
fraud among prison inmates?
Mr. DOE. Well, not only South Carolina, within the United
States, it is very large.
Chairman RAMSTAD. How do you know that?
Mr. DOE. How do I know that? I got a lot of friends that
come from different States and they tell me how people file
taxes at their institutions.
Chairman RAMSTAD. Do most of the inmates committing tax
fraud have lengthy prison sentences?
Mr. DOE. No, sir. Some of them don't have lengthy prison
sentences. Some of them just have 4 or 5 months left, and they
file taxes.
Chairman RAMSTAD. Is there any fear? Are inmates afraid of
getting caught committing tax fraud?
Mr. DOE. Well, if they get caught, the majority of time
they just charge them a fine and a penalty.
Chairman RAMSTAD. So, it is fair to say there is not a lot
of fear out there among the inmate population for getting
caught?
Mr. DOE. No, sir, there ain't a lot of fear.
Chairman RAMSTAD. The Chair would recognize the Ranking
Member, Mr. Lewis, for questions.
Mr. LEWIS. Thank you very much, Mr. Chairman. Thank you
very much for being here, sir. Let me ask you, what do you
recommend be done to stop tax refund fraud by inmates? What is
your recommendation?
Mr. DOE. Well, if I had to recommend something to stop it,
I would change the actual W-2 form. When I say change it, I
mean like put a hologram or something in it where you can't
duplicate the form, because it is so easy to run a Xerox of it,
say, for instance, for the inmates, that we could run copies
all the time and file the taxes. If there is a hologram of
something like that within the paper where you can't duplicate
a copy, it would pretty much prevent it because the only
copying machines they have at the institutions is the standard
copying machines. We don't have color copiers or nothing like
that within the institutions.
Mr. LEWIS. Thank you. What did the IRS investigator tell
you when he finally visited you in prison?
Mr. DOE. The two investigators just asked me if I had done
it. I admitted to doing it, and then they wanted to know how
long I had done it, how many years I had done it, and this and
that, and how much money was involved. I was just honest with
them. I told them yes, I had done it. I filled out the taxes
for pretty much everybody. I typed them up. I was just
basically honest with them.
Mr. LEWIS. Did you mention that you had help and maybe
cooperation from individuals outside of the institution?
Mr. DOE. You say did I have help from----
Mr. LEWIS. Right.
Mr. DOE. Well, what we would do, say I went to a inmate and
filed his taxes. He might send it to his girlfriend. He might
send it to his sister or his mom or someone like that, or they
might have a bank account on the street and we would direct
deposit the checks to the bank account.
Mr. LEWIS. You had the ability and the capacity to do all
of this from inside of the prison?
Mr. DOE. Yes, sir.
Mr. LEWIS. Let me ask you--and be candid, frank, if you
can--why are you testifying here today? What if anything did
you get from the prison system or the Subcommittee in exchange
for your testimony today? Did anyone offer you anything or----
Mr. DOE. No, sir, I have not been offered nothing. I come
here on my own free will. I didn't have to come here. One
reason I came here is I want to get out of prison. I have been
locked up in the South Carolina prison since 1987.
Mr. LEWIS. That is a long time.
Mr. DOE. I have been in 18 years. I just recently caught 5
years Federal time. I am wanting to get this behind me. I don't
know what it is like to go to a Winn-Dixie to buy some
groceries. I don't know what it is like to go shopping. I want
to get out and I want to go home.
Mr. LEWIS. In testifying here today and telling of your own
experience, you believe that you are helping to make a
contribution that will help the IRS and help the Federal
Government to put an end to tax refund fraud in the prison?
Mr. DOE. I hope it does, because like I said, I want to get
out and be a productive citizen 1 day myself. So, if I am out
on the street and I am working in a legit job and filing legit
taxes, I don't want some inmate filing taxes and beating the
government as I have. So, that is one reason I came to testify
also.
Mr. LEWIS. That is a good desire, and that is something to
look forward for, and I, for one, wish you well. Thank you, Mr.
Chairman.
Chairman RAMSTAD. Thank you, Mr. Lewis. The Chair
recognizes Mr. Shaw for questions.
Mr. SHAW. Thank you, Mr. Chairman. Does the South Carolina
Department of Corrections, do they censor the mail coming in
and going out of the prison?
Mr. DOE. Yes, sir, they do censor the mail coming in and
coming--and the outgoing mail. We cannot seal it up. The main
way we have been sending them out is through the visitation.
Just recently this year, the investigators for South Carolina
Department of Corrections have started searching the inmates
going on visit because a lot of time we smuggle out letters,
like sending the IRS tax forms in, already sealed up. We might
give it to our visitor and they will drop it in the mail for
us. Recently this year right here, they started searching us
when we go on a visit, where we can't take no mail out to mail
out.
Mr. SHAW. Did any of your customers get prosecuted for
this?
Mr. DOE. Yes, one other guy was prosecuted also. Actually
it was him and his mother that was involved, which he--the guy
is still in the South Carolina Department of Corrections, and
they gave his mother probation because the only thing she done
was gave us her bank account number, which we lied to her to
get the bank account number. We told her that we had some
friends that worked in the prison industry, which prison
industry makes minimum wage in South Carolina. So we lied to
her and told her that we had some friends that wanted to
deposit their checks, so she gave us her bank account number.
Then we put the fraudulent checks into her bank account. So the
judge gave her probation last month in Federal court.
Mr. SHAW. How do the inmates get the $1,000 to pay you, and
how do they get that into the prison system?
Mr. DOE. Okay. Once they get the checks, say it is direct
deposited to one of their girlfriends or wherever or sent to
the street, and they get somebody to cash it. Then they smuggle
the $1,000 back to me or else I have it sent to my South
Carolina Department of Corrections prison account, or I have
one of my friends on the street pick the money up for me.
Mr. SHAW. That prison account, is that an account within
the prison?
Mr. DOE. Yes, sir, it is an account that we got. We got a
debit card where we get to go to the canteen to spend our money
from my account.
Mr. SHAW. You must have had one of the biggest accounts in
the South Carolina prison system.
[Laughter.]
Mr. DOE. Well, I wouldn't say that because I looked out for
a lot of guys that was poor and indigent, and a lot of these
guys don't have no family or nothing so I would look out for
them. Some of them don't even have toothpaste and soap and
stuff to wash with or brush their teeth with, and I would make
sure I supplied that to them.
Mr. SHAW. Have any of your buddies in the prison, are you
fearful at all that they might try to retaliate since you went
ahead and pled out and confessed to what you had done?
Mr. DOE. No.
Mr. SHAW. I assume you named some names too.
Mr. DOE. Most definitely. They know everybody that I filed
the taxes for, but I ain't going to have no repercussions of it
because I pleaded guilty to them. It was actually my
handwriting, my format, my typing and handwriting where I
signed. I signed them people's names, the other inmates names
on the tax returns, so I pled guilty to all of that.
Mr. SHAW. Now, you filed the name plus the correct Social
Security number on the return itself?
Mr. DOE. Did you say ``Was it a correct name?''
Mr. SHAW. Yes. Did you print the correct name plus the
inmate's Social Security number on the return itself?
Mr. DOE. On the returns? Yes, sir. I put all of that in my
handwriting.
Mr. SHAW. Now, there is nothing unique about this that
means that it goes on in prison and can't go on anywhere else,
is it?
Mr. DOE. No, I am sure there is probably people on the
outside in society doing it also. So, that is why I recommended
the hologram or something on the W-2 form where you couldn't--
--
Mr. SHAW. Well, the W-2 is supplied by the employer and
sent to the employee, so I don't know how you could protect
that because anybody can pick them up because the employers are
required to get those to file them on their employees, and most
of them are--large employers, they are computerized anyway. So
I am not sure that would work. It might be something we should
bring up with the IRS when they come, the next panel. The fact
that it had some identifying number that couldn't be
counterfeited on it doesn't mean that you couldn't get a supply
of them because the employers are required to use them.
Mr. DOE. Yes, sir, you are correct about that, but also you
have to have your Federal employer number to get them W-2
forms.
Mr. SHAW. You are a smart man. You will make it all right
when you get outside if you stay straight.
Mr. DOE. I hope I can. I hope I can get out hopefully soon,
the sooner the better.
Mr. SHAW. I hope you are a lot smarter now than you were
when you went in.
Mr. DOE. Yes, sir, I am.
Mr. SHAW. Thank you, Mr. Chairman.
Chairman RAMSTAD. Thank you. The Chair recognizes Mr.
Hayworth, distinguished gentleman from Arizona.
Mr. HAYWORTH. Thank you, Mr. Chairman. Inmate Doe, you have
offered some insight. I don't know, we could nickname this scam
H&R Cellblock, because you really had a racket going on. In
your South Carolina Department of Corrections account, how
large did that grow, or did you take efforts to hide and shift
funds so it would never reach a considerable sum?
Mr. DOE. I kept it as low as $1,000 on it. I would shift
the money around. I wouldn't have no more than $1,000 on my
account, because they monitor it. The South Carolina Department
of Corrections, they monitor all the accounts.
Mr. HAYWORTH. This is so incredible. I guess different
States have different policies in terms of mail. You said you
were able to Xerox tax forms. What about the envelopes you
would use? Does South Carolina have any regulation as to the
envelopes being utilized for mail? Was there anything that
would flag your mail heading out to the IRS?
Mr. DOE. No, sir. We get regular post office envelopes. We
get to buy them from the canteen, same as outside envelopes,
but if we mailed it through the mail room it would have
Department of Corrections stamped on the back of it.
Mr. HAYWORTH. Let's retrace some of your testimony. When an
investigator from the South Carolina Department of Corrections
basically got onto you and then alerted the IRS, what year was
that?
Mr. DOE. That was 2001 when they got onto me.
Mr. HAYWORTH. Two-thousand one?
Mr. DOE. Yes, sir.
Mr. HAYWORTH. You filed fraudulent returns as recently as
this year, 2005?
Mr. DOE. Yes, sir.
Mr. HAYWORTH. When did you finally encounter an IRS agent
or investigator? Did it happen that same year of 2001, or was
there----
Mr. DOE. No, they didn't come that year. They wouldn't
come. The investigator, Mr. Bentley contacted them, but they
wouldn't come to investigate it, so nobody came. So, 2002 is
actually when they came and talked to me about it.
Mr. HAYWORTH. What was the nature of the contact: a
questionnaire, a telephone call, a meeting, a joint meeting
with the prison investigator?
Mr. DOE. A meeting. They came to the institution and talked
to me. That is when I admitted to it.
Mr. HAYWORTH. Now, I really want to get this straight in my
own mind. The IRS was alerted in 2001?
Mr. DOE. Yes, sir.
Mr. HAYWORTH. You had no contact with them in follow up
until when?
Mr. DOE. Till 2002, like June of 2002.
Mr. HAYWORTH. So a year went by?
Mr. DOE. Maybe just a little over a year.
Mr. HAYWORTH. Over a year?
Mr. DOE. Yes, sir.
Mr. HAYWORTH. After this had been flagged.
Mr. DOE. Yes, sir.
Mr. HAYWORTH. As you mentioned, this is widespread. You are
hearing from inmates who end up in South Carolina from other
States and the talk in the prison yard is this is a common
scam?
Mr. DOE. Yes, sir. That is the word that I am getting, that
it is a pretty large-scale scam right now as we speak. Probably
this year alone, if I had to estimate, they probably done lost
a couple million dollars, the IRSs, just on the Eastern Region,
which would be Atlanta, Georgia where you file there--Florida,
North Carolina, South Carolina files to Atlanta, probably at
least done lost a couple million dollars.
Mr. HAYWORTH. Well, this testimony is most insightful. Mr.
Chairman, we have to slam the door shut on H&R Cellblock. I
yield back.
Chairman RAMSTAD. The Chair recognizes Mr. Beauprez, the
distinguished gentleman from Colorado.
Mr. BEAUPREZ. Thank the Chairman. Inmate Doe, I thank you
for being with us today and being very candid. You are
absolutely correct, unfortunately, that this is a widespread
problem. I am familiar with a case in Colorado, and I am
referring now to a news article, February 11, 2004, printed in
the Rocky Mountain News about an inmate from Buena Vista,
Colorado, our correction facility there, one of them. He was a
bit more aggressive than you, sir.
[The information follows:]
Rocky Mountain News: February 11, 2004, Wednesday, Final Edition,
Page 4A
Inmate Cooks Up Fraud: From Prison Kitchen Comes W-2 That Nets Him
Huge Tax Refund
By Karen Abbott
If you make a mistake on your Federal tax return, the IRS likely
will correct it, just as it did for John Wesley Sarpy.
The Federal return that Sarpy filed in 2002 indicated he earned
nearly $1 million in 2001 and was due a refund of $213,000 and change.
The IRS, noticing he hadn't claimed the standard deduction for
himself, corrected his return and sent him a refund check for more than
$215,000.
There was just one problem.
Sarpy's tax return was false.
He based it on a fake W-2 form that he created on a computer in the
prison kitchen at the Buena Vista Correctional Facility.
At the time, Sarpy was incarcerated in Buena Vista, doing time for
aggravated motor-vehicle theft.
``He's somewhat unique,'' said John Harrison, special agent and
spokesman for IRS criminal investigation in Colorado.
He said the agency usually catches refund cheats before it sends
them checks.
This time, it was an alert employee at a check-cashing store who
contacted authorities when Sarpy's fiancee tried to cash the noticeably
large check.
Sarpy, 31, has pleaded guilty to making a false claim, a Federal
felony. Denver U.S. District Judge Edward Nottingham will sentence him
Friday.
It's not Sarpy's first round in Federal court.
In 1998, when he was a senior claims representative in the Denver
office of Allstate Insurance, he was charged with writing checks for
phony insurance claims and depositing them in an account he opened
under a fake name.
The next year, Sarpy was back in Federal court, accused of writing
an unauthorized check on a business account at Norwest Bank.
He served Federal time in a prison on the Texas-New Mexico border
and was back in Colorado, doing time for the auto-theft conviction,
when he filed the fake tax return.
Sarpy claimed he had worked for a company called Synova Inc. In
fact, he had.
He had earned $16,752 in 2001, between prison terms, and Synova had
withheld $3,287 for his Federal taxes, according to court documents.
On the prison computer, those amounts became earnings of $987,219
and a withholding total of $576,495.
Harrison said the IRS started its Questionable Refund Program in
1977, after it became apparent that some people were filing false
claims for income-tax refunds.
He said tax returns are examined and scored on a variety of items
that might make them suspicious.
``They look at literally thousands and thousands of returns,''
Harrison said.
The math is checked, too.
All that happened to Sarpy's tax return, he said.
``The only problem, of course, in this particular case, is the guy
had apparently enough legitimate information to fool the system,''
Harrison said.
Since the Questionable Refund Program began, refund cheats have
claimed more than $2 billion of refunds they aren't entitled to
receive, Harrison said.
``And of that amount, we successfully stopped an average of 86
percent,'' he said.
Sarpy, he said, ``falls kind of in that other 14 percent.''
INFOBOX
Tax time
While you're figuring out your 2003 returns, John Wesley Sarpy will
be serving time in a Federal prison for filing a fake return for 2001.
His case by the numbers:
$213,383 Net refund from the IRS.
$1,972 Average individual refund last year.
108 The number of average refunds it takes to match Sarpy's.
______
Mr. BEAUPREZ. He had filed a claim with the IRS, stating
that he had earned a million dollars in 2001, asked for a
refund check of $213,000. The IRS, in its benevolence,
corrected that, said that he hadn't claimed the standard
deduction for himself, so they sent him a check for $215,000.
[Laughter.]
Mr. BEAUPREZ. He made one rather critical error. He gave
the check to his girlfriend, and she went to a check-cashing
facility and they thought that that was a little unusual that
someone would walk up with nearly a quarter of a million dollar
check at that sort of a facility and ask that it be turned into
cash. Thankfully, the attendant at that facility reported it to
the authorities, who followed up. I want to follow the
direction of Mr. Lewis a little bit, and ask more. If this is
so easy--and I respect that you are suggesting in order to make
it not so easy, how do we stop this, that some kind of a unique
document is one suggestion. I am assuming that maybe there are
others. Please help us. I sense your sincerity and I admire
that. How might we get in front of this curve?
Mr. DOE. Okay. One way, like I said, would be the hologram
on the actual W-2 form itself. Another way would be when your
employer gives you your W-2 form, make you put your thumbprint
on it. The reason I say your thumbprint is because if the IRS
runs an National Crime Information Center (NCIC) check on it,
it is going to show. If I am an inmate and I put my thumbprint
on this W-2 form, it is going to show that I am a convicted
felon. So, that would be another way.
Mr. BEAUPREZ. You mean everybody or people incarcerated?
Mr. DOE. Everybody that gets a W-2 form, have their
employer put one thumbprint on it.
Mr. BEAUPREZ. All right.
Mr. DOE. There should be a section on there for you to put
your thumbprint. From what I have noticed over the years, there
ain't no place to put no thumbprints or no type of prints or
nothing. That is how a lot of people is getting identity theft,
stealing people's identity. It is so easy to steal your
identity now that it is a shame, it is pathetic; but one thing
for sure is, the fingerprints won't lie. It is just like your
DNA, it ain't going to lie. So, that is another way: your
fingerprints, put fingerprints on your W-2 forms.
Mr. BEAUPREZ. What about the penalty? You said that
basically no fear, one, not very many people seem to be getting
caught, and even if you get caught, by your experience, I guess
you sit around waiting for justice to show up at your door.
Would increasing the penalty somehow catch anybody's attention
or not?
Mr. DOE. Well, I would kind of doubt that also, because of
so many people that file, it is actually hard to catch you
unless they audit you. You cam cheat and lie on your taxes and
get away with it as long as they don't audit you.
Mr. BEAUPREZ. I don't think so. I am a Member of Congress.
They watch us pretty closely.
Mr. DOE. If they audit you, then that is when they are
going to catch you. So, stiffening the penalty would actually
be--that really wouldn't do much neither. From what I can see,
I don't think that would even help.
Mr. BEAUPREZ. In the time I have remaining I want to make
mention of part of the rest of your testimony. Mr. Chairman, I
note with some considerable concern that this crime, as serious
as it is, seems like it really begets further crime. The abuse
of drugs--it is really feeding, it looks like, illegal drugs in
our prisons. In your testimony you state that the money and the
drugs eventually lead to beatings, stabbings, extortion. It is
turning our correction facilities into more of a problem, not
less of a problem. The word ``correction'' seems to be maybe
misplaced. By not controlling, enforcing this problem, the
money problem, the source of money, we are only adding fuel to
the fire. Would that be a fair characterization, Mr. Doe?
Mr. DOE. Yes, sir, that sounds about correct. It is leading
to a lot of destruction and a lot more drugs and stuff into the
institutions, and you are pretty much right, what you said.
Like the extortion, a lot of extortion goes on because there is
so much money and drugs coming into the institution. So,
actually, there has been a lot of more crime coming into the
institutions. Back when I first started doing my time there
wasn't as many stabbings and stuff as there actually are now.
The director we got in South Carolina is a good director. He
pretty much tries to control like the tax forms and stuff
coming in. They got memorandums up that they are strictly
contraband. The mail room people-- you can't get them mailed in
and stuff. So, he pretty much is trying to control it in South
Carolina, but it is still out of hand.
Mr. BEAUPREZ. I thank the gentleman. Thank you very much
for being with us.
Chairman RAMSTAD. The Chair recognizes the gentleman from
North Dakota, Mr. Pomeroy, for questions.
Mr. POMEROY. Mr. Chairman, I apologize for missing part of
this witness's testimony. There was a debate on the floor I was
participating in. I would just say to the witness, I want to
thank you for coming forward. For this Committee to do its
oversight job, we really have to be able to get at what is
really happening out there, and relative to this prison scheme
your testimony is very helpful in that regard. I appreciate you
coming forward, and I would certainly hope that no harm will
befall you as you go back to incarceration for helping us out
as a Committee. Thank you very much. I yield back, Mr.
Chairman.
Chairman RAMSTAD. The Chair recognizes the esteemed
gentleman from California, Mr. Nunes.
Mr. NUNES. Thank you, Mr. Chairman. I want to thank you,
Inmate Doe, for being here today, for your testimony. Most of
the questions have already been asked, but I did find it
interesting in your testimony, toward the end when you talk
about where your money went to, you mentioned the Muslim
community, in order to be in their good graces for security
reasons. Could you expand on that?
Mr. DOE. Okay. What I was talking about for security
reasons, like the stabbings and extortion and stuff like that.
With a person that was making that kind of money within an
institution like myself, I had to have some kind of security so
I wouldn't get stabbed or whatever. Sometimes when somebody
would come and want to talk to me about filing taxes, they were
liable to have to get strip searched and all just to even come
to see me. The reason I done it like that is because, you never
know, somebody might have been jealous of me making that kind
of money and want to come and kill me. So, I wasn't taking no
chances. I was trying to make this money, get this money. I
have been locked up all my life. It ain't like I had no job on
the street or nothing, and I wanted to make money. So, that was
the only way I could make money. If I had been out in society,
I am sure I probably would have never even done this scheme or
scam if I had been out in public society. With the situation I
was in, I had to come up with something to make money because I
like to drink drinks, I like to eat, I like to have things and
there wasn't no way possible without it. My mom, she might send
me $10 a month, but expensive as stuff is, like cigarettes is
like $5.40 a pack inside the prison, I couldn't supply myself.
So, I had to come up with something; that is another reason I
came up with the plan. What you said, the security reasons,
that is why I gave the Muslims $5,000 for security, so nobody
would try to hurt me.
Mr. NUNES. The Muslims within the prison where you are?
Mr. DOE. Within the prison, yes, sir.
Mr. NUNES. I want to thank you for your testimony. Mr.
Chairman, with that I yield back the balance of my time.
Chairman RAMSTAD. On behalf of Mr. Lewis and the entire
Subcommittee, the Chair thanks Mr. Doe for voluntarily
testifying before the Subcommittee and shedding light on the
problem of tax refund fraud by prison inmates. The Chair also
appreciates, as do the other Committee Members, your candor
here today, your forthrightness, and we wish you well in your
recovery from addiction that you talked about earlier. Thank
you again, Mr. Doe.
Mr. DOE. You are welcome.
Chairman RAMSTAD. The Chair, as soon as the hearing room is
reconfigured, would call the third panel.
The Chair now calls the third panel consisting of Nancy J.
Jardini, Chief of Criminal Investigation of the IRS; the
Honorable J. Russell George, Treasury Inspector General for Tax
Administration, U.S. Department of the Treasury; John M.
Moriarty, Inspector General, Texas Department of Criminal
Justice; and Jeff Bentley, Criminal Investigator, South
Carolina Department of Corrections. I would remind the
witnesses of the 5-minute rule. Thank you for appearing here
today, and we look forward to your testimony. We will begin
please with Ms. Jardini.
STATEMENT OF NANCY J. JARDINI, CHIEF, CRIMINAL INVESTIGATION,
IRS
Ms. JARDINI. Thank you very much. Thank you for the
opportunity to discuss the dramatic increase in fraudulent
prisoner returns. This is an urgent problem that erodes
legitimate taxpayer confidence in our system. I would
especially like to commend this Subcommittee and your
leadership, Chairman Ramstad, as well as Ranking Member Lewis,
for your interest and support in helping us address this
burgeoning area of fraud. Additionally, I wanted to commend the
Subcommittee staff, who were extremely helpful as we worked
together to prepare for today's hearing. During 2004, 106
million refund returns were filed with the IRS. The majority of
these returns were filed by legitimate taxpayers who were
deserving of a prompt refund. Fraudulent claims totaled 122,000
returns, or less than 1 percent of all refund returns. Eighteen
thousand of those were fraudulent prisoner returns.
Despite the relatively small percentage that prisoner fraud
represents of overall refund fraud, we recognize its enormous
impact on our system of voluntary compliance. We have seen
exponential growth in prisoner fraud in the last 5 years. As
Exhibit 1 to my right demonstrates, prisoner refund fraud
represented only 5 percent of overall refund fraud just 3 years
ago compared to 15 percent last year. When we look behind these
numbers, we can identify some specific trends. As Exhibit 2
demonstrates, overall prisoner returns are filed electronically
more frequently than on paper, as with the general population.
However, a majority of false prisoner returns are paper
returns. In fact, in 2004, 78 percent of all false prisoner
returns were filed on paper. For this reason, we have devoted
additional resources to detect fraudulent prisoner paper
returns and stop those returns at the same rate we stop
electronic returns that are false. Further, 99 percent of false
prisoner returns use either single or head-of-household filing
status. While false Schedule C income and substitute W-2s are
used in prisoner refund fraud, the majority of claims involve
false or forged W-2 documents. As Exhibit 3 demonstrates,
almost 80 percent of false prisoner returns are identified and
stopped by the IRS prior to the issuance of the refund. As you
can see from the chart, despite the dramatically increased
volume in prisoner refund fraud, in 2004 we at the IRS stopped
more false prisoner refunds than we did in the prior 4 years
combined. Notwithstanding these efforts, there is much more to
be done.
[The exhibits follow:]
[GRAPHIC] [TIFF OMITTED] T4905A.001
[GRAPHIC] [TIFF OMITTED] T4905A.002
[GRAPHIC] [TIFF OMITTED] T4905A.003
----------
Ms. JARDINI. Our first priority at the IRS in prisoner
refund fraud is to identify the false claims quickly enough to
stop the refunds before they go out. Criminal Investigation
employs approximately 600 investigative analysts in our Fraud
Detection Centers nationwide who use sophisticated data mining
techniques and critical investigative analysis to detect and
stop fraudulent claims for refund before they go out. A second
and equally important defense against refund fraud is our
highly sophisticated data mining system, the Electronic Fraud
Detection System (EFDS). The EFDS screens every single refund
return that comes into the IRS. That means last year 455,000
prisoner returns were analyzed by this data mining tool.
Another critical tool in the fight against prisoner refund
fraud is our relationships with our State and Federal prison
authorities, like my colleagues on this panel. Their
cooperation in providing prisoner identifying data which we
load into the data mining systems is absolutely vital to our
detection efforts.
Despite these tools, we in the IRS face significant
challenges in improving our fraud detection efforts. One
challenge that has already been mentioned is the non-disclosure
provisions of section 6103, which prohibit disclosure of tax
information unless that disclosure meets an enumerated
exception. None of the exceptions in 6103 permit the IRS to
refer inmate refund fraud information to prison officials for
the imposition of administrative sanctions. Piling on
additional years of incarceration to a hardened inmate may not
be the most effective deterrent. If prisons could take away
prisoners' administrative privileges for engaging in this
conduct, the oh-so-important cigarettes, candy bars,
television, and visitation privileges, it would create a cost-
effective deterrent that would benefit both the Federal
Government and the prison systems.
Another significant challenge is that despite the fact that
State and Federal prison officials are very helpful in
providing prisoner identifying data, almost 20 percent of the
data that we receive from the States is inaccurate. Further,
the disparate formats utilized by the individual States are
time-consuming and difficult to reconfigure to upload into our
systems. Criminal Investigation within IRS has numerous
competing resource demands. Even though our resources have
remained relatively flat over the last few years, we have
dedicated an additional 35 percent of our resources to the 600
employees I previously mentioned in the Fraud Detection Centers
to address refund fraud growth. Those resources must be
diverted from our other important enforcement priorities,
including high income tax evaders, offshore abusive schemes,
and abusive charitable entities.
Despite the fact that our annual budget exceeds $500
million and we have over 4,100 current employees in Criminal
Investigation, the President's 2006 budget has one budget
initiative request for Criminal Investigation. That request is
for $10.7 million to be used strictly to curtail fraudulent
refund fraud, and we urge you to support that budget request.
Mr. Chairman, we appreciate very much the opportunity to be
here to discuss this with you, and I will be happy to take any
questions at the appropriate time.
[The prepared statement of Ms. Jardini follows:]
Statement of Nancy J. Jardini, Chief, Criminal Investigation, Internal
Revenue Service
Thank you for the opportunity to discuss our concerns regarding the
dramatic increase we are seeing in fraudulent prisoner refund fraud
schemes. Like you and all taxpayers, we are appalled at this attack on
our federal revenue. Your support for removing identified impediments
to preventing these schemes will help us more effectively address this
burgeoning area of fraud and will also assist us as we continue to
identify, anticipate and stop prisoner refund fraud.
Overview of Prisoner Refund Fraud
There is no question that prisoner refund fraud is on the rise.
Even though prisoner returns comprised less than one half of one
percent of all individual federal income tax returns filed in 2004,
over fifteen percent of all false refund returns used prisoner names
and taxpayer identification numbers.
Overall refund fraud has increased significantly since 2001 along
with prisoner refund fraud. A majority of these false refund requests
are identified and frozen prior to the issuance of the refund. During
processing year 2004, over 130 million returns were filed with IRS,
including approximately 455,000 prisoner returns. During the same
period, CI reviewed nearly 500,000 questionable refund returns
including at least 36,000 prisoner returns. Of those, we identified
more than 118,000 fraudulent tax returns including 18,000 false
prisoner returns. To explain this in terms of potential harm to the
government, overall fraudulent refund claims that we are able to
identify exceeded $2.2 billion \1\ in 2004 of which we were able to
stop the issuance of refunds in over 94%. Of the $68 million claimed on
false prisoner returns that we are able to identify we were able to
stop the issuance of 78%.
---------------------------------------------------------------------------
\1\ This number includes one scheme with two returns totaling $1.8
billion.
---------------------------------------------------------------------------
The number of American taxpayers choosing to electronically file
their tax returns continues to rise each year from 36% in 2002, to over
50% in 2005. This electronic filing trend holds true for the overall
prisoner population, yet the number of false prisoner paper returns has
risen considerably. Between 2002 and 2004, total paper returns filed by
prisoners decreased by 21%. However, in 2004, 78% of all false prisoner
returns were paper returns, compared to only 50% of false prisoner
paper returns in 2002. Incomplete 2005 data reflects continued growth
in fraudulent activity in paper returns and increasing fraud in
electronic filings.
Types of Schemes
The manner and means by which prisoners deploy fraudulent refund
schemes is constantly evolving. Schemes can be as simple as false wage
and Earned Income Credit (EIC) claims using a cellmate's social
security number, or as complex as a prisoner, in concert with outside
co-conspirators, filing false income tax returns online utilizing
stolen identities, followed by sophisticated financial transactions
intended to disguise the true source of the funds. The characteristics
of prison refund schemes are as varied as refund schemes implemented by
non prisoners.
Of the 18,000 fraudulent prisoner returns detected in 2004, a
number of different fraud schemes were utilized including identify
theft, filing numerous false forms including Schedule C, Form 1099,
Miscellaneous Income, Form W-2, and Form 4852, Substitute for W-2.
Numerous tax credits to which the prisoners were not entitled were also
claimed, including the EIC, Advanced Earned Income Credit, Child and
Dependent Care Credit, Education Credit, Child Tax Credit, and the
Adoption Credit. In perpetuating these schemes, many prisoners received
outside assistance from family or friends.
Tools Used To Identify and Stop Prisoner Refund Fraud
A wide range of tools are used by the IRS overall to identify and
stop prisoner refund fraud. These tools include automation processes,
manual review of questionable returns and return information, referral
of questionable returns identified by IRS processing functions and
referred to our Fraud Detection Centers (FDCs), and ongoing
coordination and communication with correctional facilities, banks,
other government agencies, individuals, and electronic return
originators (EROs).
Tools--Fraud Detection Centers
The fundamental mission of the IRS Criminal Investigation, or CI,
is to serve the American public by detecting and investigating criminal
violations of the Internal Revenue Code and related financial crimes.
As a part of the CI mission, Fraud Detection Centers and the Office of
Refund Crimes are staffed by highly skilled and trained analysts who
specialize in statistics and analytical areas such as return
processing, computer operations, the Questionable Refund Program (QRP),
and the Return Preparer Program (RPP). FDCs are responsible for the
detection and development of fraudulent refund schemes at the 10 IRS
Campuses where returns are processed. These teams of investigative
analysts evaluate data identified by data mining algorithms, conduct
critical investigative analysis, and work together with our partners in
the civil divisions of the IRS to detect fraudulent returns and delete
fraudulent claims for refund. Once schemes are identified and refunds
are stopped, these schemes may be referred to a CI special agent for
criminal investigation or to an IRS civil division for examination. The
CI Office of Refund Crimes manages the FDCs and is based in CI
Headquarters.
Tools--Technology
In the mid 1990s, the IRS worked with an outside contractor to
study refund processing. One of the key results of that study was the
development and deployment of a highly sophisticated data mining system
which is utilized by the Electronic Fraud Detection System (EFDS), an
automated system that improves the effectiveness of the manual
screening process. EFDS is used by the Criminal Investigation FDCs to
screen all returns filed with the IRS requesting a refund. EFDS houses
more data than any other computer system at the IRS with the exception
of the IRS Master Fileand has the capability to combine refund returns
with other IRS files into one centralized system.
All refund returns are scrutinized by EFDS, which results in the
identification of a substantial proportion of false returns. While this
system has greatly enhanced the way the IRS identifies false returns,
IRS is still unable to detect all false returns. As new schemes are
identified, we program our computer systems to identify them to
maximize the efficiencies of the automated systems.
When we identify new schemes, it is often after some refunds have
already been issued. We are then faced with the challenge of collecting
that money. If we determine that a return is false after the refund has
already been issued, controls are placed on the taxpayer's account to
prevent future refunds from being issued based on subsequent false
returns.
In 2004, over 50% of false prisoner returns requested either direct
deposit refunds or Refund Anticipation Loans (RALs). Prisoners usually
request these refunds be routed to any number of locations including
their prison account or to bank accounts in accomplices' names outside
the prison. Similar to tax evasion schemes, prisoners or non-prisoners
may set up complex financial transactions that span the globe in an
attempt to obscure the money trail.
Tools--Analysis
We are vigilant about our efforts to quickly identify new refund
schemes, stop those refunds and update our data mining tools with data
regarding that scheme. We have had success with our automated systems--
they do a great job with the information we give them. However, these
systems cannot do what our trained, skilled investigative analysts and
criminal investigators do, which is to find fraud through a physical,
manual review of refund returns utilizing their knowledge and
expertise. Once a fraud scheme is identified, analysts and criminal
investigators must work quickly to determine the full scope of the
scheme by conducting further research, evaluating all scheme
characteristics, and conducting criminal investigations if warranted.
Tools--Prevention and Coordination
In an effort to prevent prisoner refund fraud, we have developed a
close working relationship with many states and with individual prison
officials. In some instances, tax forms have been removed from prison
law libraries, and some states have declared tax materials found in
prison cells to be contraband. Most states, the District of Columbia,
and the Federal Bureau of Prisons strive to comply with IRS requests
for an annual listing of all inmates. The prisoner information included
in these listings is used to identify prisoner refund returns which are
then incorporated into the data mining system utilized by EFDS to
identify questionable prisoner returns.
Another significant deterrent for prisoner schemes is the agreement
by many prison officials to identify and forward to CI any inmate mail
addressed to the IRS for review. However, some prisoners don't seem to
appreciate this scrutiny as evidenced by correspondence we have
received. For example, a letter addressed to Commissioner Everson from
an inmate complaining that the prison officials ``didn't let me send my
letter'' is signed by a prisoner who falsely claimed that he was self
employed and wanted to file his taxes and receive his earned income
credit. In another instance, a clever greeting card was made in a
prison craft shop. On one side it had a hidden pocket containing six
false Forms W-2 and the other side contained a hidden pocket containing
six fraudulent returns. The card was addressed to someone outside the
prison system. Alert correction officers noticed that the card was
heavier than a normal greeting card and, after discovering its
contents, forwarded it to CI for further investigation.
Tools--Outreach
Our outreach includes meetings with prison officials on the local
and national level to discuss the types of schemes we see emanating
from their institutions. These meetings have been highly successful in
helping prison officials know what to look for and whom to contact when
they identify potential fraud.
We have also enhanced our efforts to educate and work with EROs and
practitioners to alert them to the possibility that prisoners may
attempt to engage them to file false returns on their behalf. Our
publicity, education and outreach have expanded to include prison
publications and websites. For the past 11 years, CI has participated
in fraud discussions with practitioners at the IRS Nationwide Tax
Forums. Our outreach efforts at these forums is far reaching; CI has
presented a Refund Fraud seminar to approximately 18,000 practitioners
and enrolled agents in the last two years alone. We also meet with
local practitioner groups to continue the dialogue about badges of
fraud and have established a tip line especially for practitioners to
alert the IRS about potential fraudulent schemes.
Each CI field office has a QRP coordinator whose outreach efforts
may include meeting with local prison officials to identify methods to
recognize potential schemes and to publicize, within the prisons, those
cases where individuals working outside the prison to help perpetrate
the fraud have been prosecuted. As you will notice from the following
cases summaries, many of these prison schemes are aided by individuals
outside the institutions who help facilitate the fraud.
Tools--Criminal Prosecution
One of the functions of the FDCs is to identify and develop
criminal cases and refer these cases to IRS special agents for
investigation. Once a refund scheme has been identified and developed,
the FDC and the field office work cooperatively to identify all co-
conspirators, which may include prisoners as well as those on the
outside assisting the inmates. Once the investigation is complete, the
case is referred for prosecution.
The government cannot prosecute every prisoner who commits refund
fraud because we must be prudent with the federal governments' limited
investigative and prosecutorial assets. Therefore, we also focus our
efforts on identifying those on the outside that assist with these
schemes, even though these outside links can sometimes be difficult and
time consuming to track. CI has demonstrated and publicized that
individuals who assist prisoners with the perpetration of refund fraud
schemes will also be prosecuted. We have had continuing success with
these prosecutions along with outreach and publicity efforts. The
following is information from the public record about cases that have
been prosecuted:
In February 2003 a Florida prisoner serving a life
sentence was sentenced to 33 additional months in prison for filing
false claims. The prisoner prepared 64 fraudulent tax returns for other
prisoners using their names and social security numbers. He also
prepared a ``self help'' manual instructing others on how to prepare
fraudulent tax returns.
In February 2005 in South Carolina, three individuals
pled guilty to filing false claims. Two individuals were prisoners and
the other individual was the parent of one of the prisoners. One inmate
prepared a number of legitimate looking but completely fictitious W-2
forms using the names and social security numbers of real but
unsuspecting fellow inmates. The prisoner then prepared at least ten
false income tax returns using the W-2s and the refunds were issued.
The other inmate convinced his mother to permit her checking account to
be used as a receptacle for many of the refunds.
In January 2005, a Minnesota prisoner pled guilty to
filing false claims. This scheme involved a prisoner who established
legitimate Employee Identification Numbers (EINs). At least 23 Forms
941, quarterly tax returns, were filed claiming advanced EIC paid to
deceased individuals. The prisoner then aided in filing at least 29
fraudulent returns for other prisoners using his business EINs and
identifying them as his employees. Some of the prisoners were aware he
was doing this and conspired with him to share the false refunds. Other
prisoners claimed they were not aware he had used their identities.
In February 2005 in Missouri, false Forms W-2 were
prepared by one prisoner and were attached to 66 returns filed by other
prisoners claiming refunds. In each case the W-2 was photocopied and
the payee information was changed. This prisoner was recently sentenced
to an additional 33 months.
On May 11, 2005, a woman in Louisiana was sentenced to 15
months in prison to be followed by three years of supervised probation
and was ordered to pay restitution to the United States in the amount
of $73,725. In addition to other refund fraud schemes, she prepared and
filed eleven fictitious individual tax returns in the names of inmates
who were in the custody of the Louisiana Department of Corrections
during 2002. She obtained the names and social security numbers of the
eleven inmates and then prepared a 2002 IRS Form 1040 on behalf of each
inmate. She used a Schedule C to falsely claim business income by the
inmates/alleged taxpayers and falsely represented that the inmates
supported dependants to qualify the inmates for EIC.
Refund Fraud Challenges and Potential Solutions
Since 2001, the number of fraudulent returns detected by the FDCs
has increased over 200%, and refund fraud using prisoner identities has
increased almost 700%. While overall CI staffing has remained
relatively steady, IRS has dedicated an additional 30% of personnel
resources to Refund Crimes and the FDCs to address refund fraud growth.
In addition, CI resources must be divided among a broad range of
chronic and emerging compliance issues, including Refund Crimes, to
address the overall IRS Enforcement Strategy.
Short of conducting a 100% audit of each refund return, the IRS
cannot stop all fraudulent claims for refunds. However, using the tools
available to us, we have been successful at stopping a substantial
number. We believe we can do better and we continue to look for
solutions that will help enhance our efforts to halt refund fraud.
Section 6103 (a) of the Internal Revenue Code prohibits the
disclosure of tax information unless that disclosure meets an
enumerated exception. None of the exceptions permit the IRS to refer
inmate refund fraud information to prison officials for the imposition
of administrative sanctions. Thus, while the IRS may possess
information related to ongoing criminal activities in prisons, it is
unable to alert prison officials of these activities.
Prisoner Information
Each year, the Director, Refund Crimes requests information from
the Federal Bureau of Prisons, the 50 states and the District of
Columbia for the previous two and one-half year period of prisoners on
rolls. That information is entered into a database and uploaded into
EFDS to populate the prison file used by CI. While each source supplies
us with the same type of data, there is minimal consistency due to
differing levels of technology, staffing and equipment. In addition,
because the prisons are not mandated to provide verified data this
program can be a low priority. We have determined that up to 20% of the
prisoner identification information we receive is inaccurate.
National Directory of New Hires (NDNH)--Health and Human Services (HHS)
Database
The Department of Health and Human Services (HHS) maintains the
National Directory of New Hires (NDNH), which is a database that
contains up-to-date new hire, quarterly wage, and unemployment
compensation information. The President's fiscal year 2006 Budget
contains a legislative proposal to expand the IRS's access to
information already being maintained in the NDNH. Funding for, and
expanded access to this database would allow CI to continue our efforts
in automating the employment verification process, thereby reducing the
overall staff hours spent on telephonic and fax verification of wage
and employment information eventually determined to be valid. Expanded
access to NDNH data for general tax administration purposes would also
assist the IRS in data matching, verification of taxpayer claims during
return processing, preparation of substitutes for return for non-
compliant taxpayers, and identification of levy sources. It is
anticipated that access to NDNH information will also enhance taxpayer
satisfaction by reducing both the quantity and time valid refunds are
either frozen or delayed for verification. This should also reduce the
number of taxpayer complaints to the Taxpayer Advocate Service because
fewer legitimate refunds will be delayed.
Under current law, can only request this information if EIC is
claimed on the tax returns in question. Full access to this database
would permit the IRS to better verify all returns, not just EIC
returns, and would enable the IRS to more timely and effectively verify
W-2 income claimed on questionable returns. It would also assist with
revenue protection by providing an automated tool to identify
fraudulent returns and to stop the corresponding refunds more quickly.
In addition to the legislative proposal for expanded IRS access to the
NDNH database, the fiscal year 2006 Budget requests $10.7 million to be
used to curtail fraudulent refund crimes. If approved, this would
provide initial funding for the NDNH data base.
Contraband in Prison Facilities
A majority of false prisoner returns in 2004 were filed using paper
Forms 1040 and Forms W-2 or Substitute Forms W-2. Some states have
already declared tax materials found in prison cells to be contraband
to eliminate these ``paper tools'' prisoners use to file false income
tax returns. IRS encourages prison systems to take these actions. If
prisoners have a legitimate need to file a federal income tax return to
fulfill their obligation to file, then volunteer income tax assistance
could be provided.
IRS forms are also available to download and print off the
Internet. Therefore, in addition to encouraging prison systems to
declare tax materials in prison cells to be contraband, IRS encourages
correctional facilities to block all IRS and online filing websites to
prevent prisoners having another way to access tax forms or to file
false electronic returns from a prison computer.
Ongoing Efforts
In processing year 2006, refunds for returns meeting
certain questionable criteria will be delayed for two weeks instead of
one to allow more time to identify and stop fraudulent refunds from
issuing.
A computer programming change request has been submitted
to limit the number of refunds that can be directly deposited into the
same bank account.
We will continue to coordinate the acquisition of
accurate prisoner information to maximize the effectiveness of our
automated systems for timely identification of questionable prisoner
returns.
We will continue to diligently analyze the
characteristics of known false prisoner returns to maximize the
effectiveness of our data mining system and to fully utilize the
specialized expertise of FDC analysts.
We will conduct training sessions regarding prisoner
schemes with all QRP field coordinators and management to discuss
expectations of the fraud program, emerging trends in prisoner refund
schemes, and to share best practices for coordinating fraud prevention
efforts with correctional facilities.
Field offices are increasing their coordination efforts
with correctional institutions, especially those with emerging or
existing refund fraud issues. This coordination will include routine
liaison contacts to discuss indications of fraud schemes, possible
prevention techniques, and to obtain information pertaining to open
criminal investigations involving prisoners.
We will assure all FDCs have procedures in place to
coordinate fraud prevention efforts with the prisons in the states that
the FDCs service. This may include the establishment of procedures for
the FDCs to review IRS correspondence sent by prisoners.
Closing
Mr. Chairman, we appreciate the opportunity to appear before this
distinguished committee to discuss our concerns and our efforts
regarding prisoner refund schemes, and we welcome your continued
support. I will be happy to answer any questions you and the other
committee members may have.
Chairman RAMSTAD. Thank you, Ms. Jardini. Mr. George,
please.
STATEMENT OF J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR
TAX ADMINISTRATION, U.S. DEPARTMENT OF THE TREASURY
Mr. GEORGE. Thank you, Chairman Ramstad, Representative
Lewis, Members of the Subcommittee. Thank you for the
opportunity to discuss with you the growing problem of tax
refund fraud committed by individuals incarcerated in Federal
and State prisons. My office is currently reviewing the extent
of prisoner fraud and the effectiveness of IRS efforts to
combat it. While our work is ongoing, I am able to draw some
conclusions at this point. Like all other taxpayers, people who
are incarcerated have a legal obligation to pay their taxes and
generally have the right to a refund of overpaid taxes. This
civic duty and legal right only partially explains why the IRS
received approximately 455,000 tax returns from prisoners last
year. However, another explanation is that prisoners have found
ways to exploit weaknesses in the operations of the IRS in
order to receive refunds to which they are not entitled. The
IRS must close gaps in its policies and procedures to prevent
this affront to America's system of tax administration from
continuing to expand.
The number of tax fraud schemes perpetrated by those in
prison is on the rise. According to the IRS, prisoners filed
about 4,300 fraudulent returns in the year 2002. Just 2 years
later, that number quadrupled to over 18,000. These figures
only account for returns identified by the IRS as fraudulent
during the processing of tax returns. With over 1 million
returns filed by incarcerated individuals during the past 3
years, there is a great risk that false returns are slipping
through the system undetected. It should come as no surprise
that a disproportionately higher percentage of fraudulent tax
returns are filed by people incarcerated for committing other
crimes. Even though prisoner returns account for only a
fraction of 1 percent of the overall total number of returns
filed, they constitute 15 percent of the fraudulent returns
identified by the IRS. Of particular concern is the fact that
even when the IRS identifies a tax return as fraudulent, it
often still pays a refund on that return. Last year, the IRS
paid 36,000 refunds on returns that it determined to be false,
4,100 of which were issued to prisoners. In 2004, returns
identified by the IRS as false still had a 31 percent chance of
being issued a refund. When you consider that false refunds
last year averaged approximately $3,600 per return, the IRS
paid $131 million in refunds that were identified as
fraudulent. Of this amount, $14.7 million was wrongly paid to
those in prison.
With prisoners filing increasing numbers of fraudulent
returns, one would expect a strong coordinated response from
the IRS to combat these schemes. Unfortunately, until recently,
the IRS did not have an overall comprehensive approach to
working with Federal and State prison officials to address tax
fraud. Instead, the IRS let its 10 Fraud Detection Centers,
which are the frontline for detecting fraudulent refund
schemes, establish their own policies and procedures for
working with prison authorities in their region. These centers
coordinated to varying degrees with the prisons in their area.
For example, we discovered that 4 of the 10 Fraud Detection
Centers have not established any procedures to ensure that mail
addressed to the IRS by those in prison is sent directly to the
detection centers for screening. As a result, this mail is
received by the IRS just like any other tax return, and the IRS
must rely on its incomplete and often inaccurate prisoner
database to identify the filer as an incarcerated person.
In addition, 8 of the 10 centers do not inform State
revenue authorities that a prisoner has been caught filing a
fraudulent Federal tax return. Sharing such information would
go a long way toward helping to ensure that prisoners caught
cheating the Federal Government would not be allowed to cheat
State governments with impunity. The IRS Criminal Investigation
division has taken some steps to address this matter.
Management of the Criminal Investigation division has proposed,
as you heard, several legislative and procedural remedies that
will improve coordination with Federal and State prison
officials. The Criminal Investigation division has also
requested computer programming changes to provide more time to
verify tax return information and to pinpoint common
characteristics of prisoner refund schemes. If properly
implemented, I believe these actions will help reduce prisoner
tax refund fraud.
It is important to note that Federal and State prison
officials also have a role to play in confronting this problem.
They must transmit complete and accurate information on their
prisoner population to the IRS for the prisoner database to be
effective. We estimate that almost 20 percent of the 2.8
million prisoner records the IRS received last year contained
missing, incomplete, or inaccurate information. About 416,000
of these records had invalid or duplicate Social Security
numbers. We also identified an additional 134,000 records of
prisoners incarcerated between September and December of 2003
that were not included in the 2004 prisoner database. These
records were not included because the IRS requires all prisoner
information to be submitted by, approximately, August of the
preceding year in order to have time to perfect the data and
enter it into the prisoner database for use in the upcoming tax
year.
If Congress required Federal and State prison officials to
provide accurate Social Security numbers and other prisoner
information in a consistent format, the IRS could obtain the
information much later in the year and include it in the
prisoner database for the upcoming tax season. This common
sense improvement, Mr. Chairman, to the quality of the
information the IRS relies upon would help prevent prisoners
from bilking the government out of millions of dollars every
year. Mr. Chairman, Members of the Subcommittee, this concludes
my prepared remarks. I would be happy to answer any questions
you have at the appropriate time.
[The prepared statement of Mr. George follows:]
Statement of The Honorable J. Russell George, Treasury Inspector
General for Tax Administration, U.S. Department of the Treasury
Chairman Ramstad, Representative Lewis, and Members of the
Subcommittee, thank you for the opportunity to discuss with you today a
particularly troublesome tax administration issue: tax refund fraud
committed by Federal and State prisoners.
In response to a request by this subcommittee, the Treasury
Inspector General for Tax Administration is conducting an audit of the
extent of prisoner refund fraud and IRS efforts to combat it. While our
work is ongoing, we are able to draw some conclusions at this point and
recommend solutions to this growing problem.
Prisoners, like all other taxpayers, have a legal obligation to pay
their taxes and have the legal entitlement to a refund of overpaid
taxes. This civic duty and legal right only partially explain why the
IRS received approximately 455,000 tax returns from prisoners last
year. Another explanation for some of these tax returns is that
prisoners have found ways to exploit weaknesses in IRS operations in
order to receive refunds to which they are not entitled. The IRS must
close gaps in its policies and procedures to prevent this affront to
the American public from continuing to expand.
Findings on Prisoner Tax Fraud
The number of tax fraud schemes perpetrated by prisoners is on the
rise. According to the IRS, prisoners filed approximately 4,300
fraudulent returns in processing year 2002. Two years later, that
number quadrupled to over 18,000. It is worth noting that these figures
only account for those prisoner returns that the IRS identified as
fraudulent during tax return processing. During the past three years,
prisoners have filed over 1.3 million returns, so the risk that
fraudulent returns are slipping through the system undetected is great.
During the course of our review, we obtained data from the IRS
Criminal Investigation Division (CI), the IRS entity responsible for
detecting fraudulent returns. The chart on the following page provides
statistics on the total number of returns filed and the refund amounts
claimed by all individuals and by prisoners as of April 1, 2005.
----------------------------------------------------------------------------------------------------------------
Processing Year (PY) 2004
Number of Returns --------------------------------------------------
Total Prisoner Percent
----------------------------------------------------------------------------------------------------------------
Total Returns Filed 130,459,600 Not Available \1\
----------------------------------------------------------------------------------------------------------------
Refund Returns Filed 106,420,000 455,097 0.43
----------------------------------------------------------------------------------------------------------------
Returns Reviewed for Potential Fraud 463,222 36,126 7.80
----------------------------------------------------------------------------------------------------------------
False Refund Returns \2\ 118,075 18,159 15.38
----------------------------------------------------------------------------------------------------------------
False Refunds Stopped 81,922 14,033 17.13
----------------------------------------------------------------------------------------------------------------
False Refunds Issued 36,153 4,126 11.41
----------------------------------------------------------------------------------------------------------------
Amount of Refunds
----------------------------------------------------------------------------------------------------------------
Refunds Requested $227,573,835,000 $758,951,862 0.33
----------------------------------------------------------------------------------------------------------------
False Refunds $440,773,403 $68,179,070 15.47
----------------------------------------------------------------------------------------------------------------
False Refunds Stopped $309,961,554 $53,456,963 17.25
----------------------------------------------------------------------------------------------------------------
False Refunds Issued $130,811,849 $14,722,107 11.25
----------------------------------------------------------------------------------------------------------------
Average False Refund $3,733 $3,755
----------------------------------------------------------------------------------------------------------------
Average False Refund Stopped $3,784 $3,809
----------------------------------------------------------------------------------------------------------------
Average False Refund Issued $3,618 $3,568
----------------------------------------------------------------------------------------------------------------
\1\ The IRS cannot identify the total number of prisoner returns filed because the prisoner data file is only
matched against refund retunrs.
\2\ This could include false returns idenfitied during IRS returns processing by the Electroic Fraud Detection
System (EFDS), which is an automated system that is used by personnel in Fraud Detection Centers (FDCs) to
review potentially fraudulent tax returns. False returns can also be identified with the assistance of prison
officials, informants, or other sources.
This chart shows that a disproportionately higher percentage of
fraudulent returns are filed by incarcerated individuals. Although
prisoner returns account for only.43 percent of all refund returns,
they account for over 15 percent of the fraudulent returns identified
by the IRS. It is difficult to be surprised that those already
imprisoned for committing a crime are more prone than the general
public to commit another crime.
Of particular concern is the fact that the IRS frequently pays
refunds on returns it has identified as fraudulent. In 2004, the IRS
paid 36,000 refunds on returns that it determined to be fraudulent;
4,100 of these refunds were issued to prisoners. Stated another way, if
a taxpayer submitted a fraudulent return in 2004--and the IRS
determined that return to be fraudulent--that taxpayer still had a 31
percent chance of receiving a refund. Taking into account that the
average false refund amount last year was about $3,600 per return, the
IRS paid $131 million in refunds on returns that it identified as
fraudulent. Of this amount, $14.7 million was erroneously paid to
prisoners.
Prisoners who cheat the tax system use a variety of tactics. For
example, two Louisiana inmates were sentenced this past March for using
the names and Social Security Numbers (SSNs) of other inmates to file
fraudulent tax returns. This scheme eventually resulted in their
conviction for conspiring to receive $266,000. In Missouri, two former
inmates, while in prison, charged fellow prisoners $100 each to prepare
a false tax return. These returns were then filed by co-conspirators
outside of the prison to obtain illegitimate refunds. In April 2005,
one was sentenced to one year and nine months in prison; the other was
sentenced to two years and six months.
As this last example illustrates, prisoners often use individuals
outside of prison to perpetrate fraud. Although the current IRS
management information system cannot report specific information on how
may prisoners use the names of other individuals to commit fraud, our
analysis of 18,343 false refunds involving prisoners for the 2004
processing year: \3\
---------------------------------------------------------------------------
\3\ In the chart on page two, 18,159 false refunds were reported by
CI as of April 1, 2005. Since that date, this number has risen to
18,343 false refunds because false returns are continuously being
identified.
Identified 1,193 schemes claiming $68.7 million in false
refunds; and,
Included 113,797 returns, not identified as prisoner
returns, claiming an additional $380.8 million in refunds.\4\
---------------------------------------------------------------------------
\4\ Returns not identified as prisoner returns could actually be
submitted by prisoners but not identified as prisoners due to the
incompleteness of the prisoner file. There could also be situations of
prisoners using the Social Security Numbers of non-prisoners.
Similarly, there could be only a few returns identified as prisoner
returns in a scheme with many other non-prisoner returns.
These figures demonstrate that prisoners often work collaboratively
with persons outside of prison in sophisticated and complex refund
fraud schemes, as evidenced by the large number of false returns
relating to prisoner schemes but not identified as prisoner returns.
At this point during our review, we can confidently state that
prisoner tax fraud is rising, prisoners file a disproportionately
higher percentage of fraudulent returns than the general public, the
IRS frequently pays refunds on tax returns despite identifying these
returns as fraudulent, and the IRS lacks adequate data to ascertain the
extent of the prisoner fraud problem.
IRS Process for Detecting Fraudulent Refund Returns
As these findings demonstrate, prisoner tax fraud is a serious
problem. To fix this problem, the IRS must improve its ability to
identify fraudulent prisoner returns.
Currently, the IRS sends all refund returns through its Electronic
Fraud Detection System (EFDS) before issuing a refund. If the filer is
a prisoner according to information provided by Federal and State
prison officials, the return is flagged with a prisoner indicator. The
prisoner indicator is one of several elements used by the EFDS to
assign a data mining score to tax returns. The higher the score a
return receives, the greater the likelihood that the return is
fraudulent.
In general, returns that receive a high data mining score must also
request a refund that exceeds a certain threshold established by CI to
be selected for further screening. The number of returns selected for
screening is then based on the amount of resources available to screen
the returns. Thus, detection of false refunds is a function of the data
mining score, the threshold established for screening, and the amount
of CI resources. These three criteria determine how many false refunds
are identified and how many false refunds slip through the processing
system undetected.
The IRS' Fraud Detection Centers are the frontline for detecting
fraudulent refund schemes. In processing year 2004, these Centers
physically screened only 36,126 of the 455,097 prisoner returns filed.
As we continue our analysis of this data, we will evaluate how--with
improved prisoner data and an invigorated commitment by the IRS to
aggressively pursue prisoner refund fraud--the IRS can identify more
high-risk prisoner returns.
Reasons False Refunds Were Erroneously Paid
As previously noted, the IRS often issues refunds on tax returns it
eventually identifies as fraudulent. The IRS attributed many of its
erroneous payments of fraudulent tax refunds to the short time
constraints it sets for itself. Part of its customer service philosophy
is to pay tax refunds promptly since the vast majority of tax refunds
are legitimate. This attempt to pay refunds promptly generally gives
the IRS about three weeks to prevent a fraudulent refund from being
paid. During that time, CI evaluates the return for indicators of
fraud, verifies any wage and withholding information with employers,
and scans other potentially fraudulent returns for similar return
characteristics, such as a common employer, street address, or bank
account. The IRS must work quickly within this time frame to ensure
legitimate refunds are paid promptly.
Paper returns in particular present the IRS with unique challenges.
The CI function must physically review the return to collect return
information that is not entered electronically. CI has even less time
on paper returns that request an electronic direct deposit of the
refund into a bank account. Prisoners may have already discovered this
weakness in the system, since over three-fourths of all fraudulent
refund returns filed by prisoners in processing year 2004 were filed by
paper instead of electronically.
We obtained a computer extract from CI that described the reason
why a refund was not stopped despite being identified as fraudulent. As
of May 4, 2005, the record contained 4,261 records of false refunds
issued to individuals identified in the 2004 prisoner file. The
following table shows the five most common reasons the IRS listed for
issuing refunds on false returns.\5\
---------------------------------------------------------------------------
\5\ These five reasons were given as explanations for 91% of the
refunds issued to prisoners who submitted fraudulent returns.
------------------------------------------------------------------------
Total Refunds Not
Reason Refund Not Stopped Stopped
------------------------------------------------------------------------
Identified after Cycle Cutoff \6\ 2196
------------------------------------------------------------------------
Other \7\ 786
------------------------------------------------------------------------
No Selection \8\ 462
------------------------------------------------------------------------
Tax Examiner Error \9\ 320
------------------------------------------------------------------------
Prior Year Return \10\ 128
------------------------------------------------------------------------
Total Top Five Reasons 3,892
------------------------------------------------------------------------
\6\ ``Identified after Cycle Cutoff'' means that the tax refund, after
going through various computer routines at a Submission Processing
Center to perfect the data for processing, was issued before certain
additional analyses could be completed that would have identified the
return as fraudulent.
\7\ ``Other'' is a generic catch-all category that TIGTA believes should
be used sparingly, as it may prevent CI from identifying the actual
reason a false refund was issued and impair its ability to improve its
system. The CI function advised that time constraints during
processing may have led to the high use of this category.
\8\ ``No Selection'' is also a generic catch-all category that TIGTA
believes should be used sparingly, as it may prevent CI from
identifying the actual reason a false refund was issued and impair its
ability to improve its system. The CI function advised that time
constraints during processing may have led to the high use of this
category.
\9\ ``Tax Examiner Error'' means that an IRS employee may have entered
or interpreted data incorrectly, or otherwise possessed information to
prevent a refund from being issued, but did not stop the refund.
\10\ ``Prior Year Return'' includes returns that were processed in the
previous year but were detected during the current processing year.
Some of these returns are identified at a later date due to an
informant or the return being associated with a current year scheme.
The chart above shows that CI chose the category of ``Other'' or
``No Selection'' for why refunds were erroneously issued to prisoners
in over 29 percent of its cases. While some use of these reasons is
legitimate, TIGTA believes they should be used sparingly to enable CI
to identify the actual reason why an erroneous refund was issued and
enable CI to correct deficiencies in its system.
CI conducted an additional analysis of the reasons tax refunds were
not stopped despite being identified as fraudulent, and identified the
causes in the chart on the next page.\11\
---------------------------------------------------------------------------
\11\ This analysis is based on 4,000 refunds; therefore, it cannot
be precisely compared with the data we obtained on the 4,261 refunds
identified in the 2004 prisoner file. Although CI's additional analysis
provides a better indication of the reason refunds were issued, CI
based some of its assumptions on data analysis, not actual reviews of
cases.
------------------------------------------------------------------------
Total Refunds Not
Reason Refund Not Stopped Stopped
------------------------------------------------------------------------
Return Preparer Case \12\ 156
------------------------------------------------------------------------
Prior Year Return \13\ 179
------------------------------------------------------------------------
Did Not Meet Data Mining Tolerances \14\ 903
------------------------------------------------------------------------
Untimely Receipt of Paper Return \15\ 694
------------------------------------------------------------------------
Direct Deposit Refund of Paper Return \16\ 576
------------------------------------------------------------------------
Volume of ELF Scanning (resource issue) \17\ 428
------------------------------------------------------------------------
Human Detection, Data, or Input Errors \18\ 1,064
------------------------------------------------------------------------
Total Refunds Issued 4,000
------------------------------------------------------------------------
\12\ CI management explained that refunds are usually not stopped in
return preparer cases because the focus of the investigation is the
return preparer, not the individual taxpayers who, knowingly or
unknowingly, are party to fraud.
\13\ Prior year returns were processed in the prior year but detected
during the current processing year.
\14\ This category indicates that the return did not meet data mining
tolerances when it was processed. However, analysts later determined
the return to be false upon reviewing a subsequent return with similar
characteristics.
\15\ In order to identify the return as fraudulent, analysts must review
the paper return; however, analysts did not receive the paper return
in time to review it and stop the refund.
\16\ Similar to the previous category, analysts must obtain the paper
return to determine its legitimacy. In these cases, the refunds were
already deposited electronically into bank accounts before the refund
could be prevented.
\17\ In citing this reason, the CI function assumed that the volume of
electronic filing scanning was so large that analysts could not review
them in time to determine whether they were false.
\18\ This category includes IRS employees who entered or interpreted
data incorrectly, or otherwise possessed information to prevent a
refund from being issued, but did not stop the refund.
IRS Efforts to Combat Tax Refund Fraud
With the dramatic increase in fraudulent refund returns filed by
prisoners, one would expect a strong, coordinated response from the IRS
to combat these schemes. However, until recently, the IRS did not have
an overall, comprehensive approach to working with Federal and State
prisons to address prisoner tax fraud. In some locations, prisoner tax
refund fraud was not considered to be a prevalent issue. Further,
according to CI management, some U.S. Attorney's offices are reluctant
to pursue these investigations, believing it is not a prudent use of
resources, particularly if the person is already incarcerated and
another conviction would not likely yield additional punitive
sanctions.
Instead of an overall, comprehensive approach, our review has
discovered that the IRS let its 10 Fraud Detection Centers located
around the country establish their own policies and procedures for
working with prisons in their region. These Centers coordinated to
varying degrees with the prisons in their area. For example, we
discovered that 4 of the 10 Fraud Detection Centers have not
established any procedures to ensure that prison mail addressed to the
IRS is sent directly to these Centers for screening. As a result, this
mail is received by the IRS just like any other tax return, and the IRS
must rely on its incomplete and inaccurate prisoner database to
identify the filer as a prisoner. Furthermore, 8 of the 10 Centers do
not share information with State tax revenue authorities that a
prisoner has been caught filing a fraudulent Federal tax return.
Sharing such information would help ensure that prisoners caught
cheating the IRS would not be allowed to cheat the State revenue
authorities with impunity.
Despite the IRS' inconsistent and incomplete approach to address
prisoner refund fraud, the CI function has conducted criminal
investigations on certain prisoners and prisoner refund schemes. Our
comparison of the prisoner database to the March 2005 Criminal
Investigation Management Information System (CIMIS) \19\ shows that the
CI function had initiated 312 primary investigations on schemes
involving 3,069 prisoner returns. From 75 of these primary
investigations, CI has initiated 128 subject investigations. We will
continue to analyze this data and provide the results of our analysis
in a report to the IRS.
---------------------------------------------------------------------------
\19\ CIMIS is a database that tracks the status and progress of IRS
criminal investigations and the time expended by special agents. It is
also used by IRS management as a basis for national and local resource
and inventory decisions.
---------------------------------------------------------------------------
Proposed Actions to Enhance Tax Refund Fraud Detection
The Criminal Investigation Division has taken some steps to address
the concerns expressed by this subcommittee and in response to our
review. Management of CI has proposed several legislative and
procedural remedies that will improve coordination with Federal and
State prisons. CI has also requested computer programming changes to
provide more time to verify tax return information and to pinpoint
common characteristics of prisoner refund schemes. If properly
implemented, I believe these actions will strengthen the ability of the
IRS to detect and deter prisoner refund fraud.
Need for Accurate and Complete Prisoner Information
I want to emphasize that the IRS is not solely responsible for
confronting this problem. Federal and State prison officials should be
required to transmit complete and accurate information on the prisoner
population to the IRS. The IRS uses the data submitted by Federal and
State prison officials in its Electronic Fraud Detection System. As
with any computer-based analytical tool, the ability to quickly and
accurately identify potential tax refund fraud is only as good as the
data used in such analyses, and we have found that much of this data is
inaccurate and incomplete.
During the 2004 processing year, we estimate that approximately
550,000, or almost 20 percent, of the 2.8 million prisoner records the
IRS received contained incomplete or inaccurate information. These
records were inadequate for the following reasons:
About 255,000 records did not have a valid SSN. For
example, over 252,000 of these records listed 000-00-0000 as the SSN.
About 118,000 records had duplicate SSNs.
Almost 43,000 records were invalid because they exceed
the highest SSN issued by the Social Security Administration.
About 134,000 records were not in the 2004 prisoner file
because the IRS required all prisoner information to be submitted by
August 2003, in order to have time to perfect the data and enter it
into IRS computer systems. This early deadline excluded individuals
incarcerated between September 1, 2003, and December 31, 2003.
The inaccuracies in the prisoner file prevent the IRS from
detecting all false refund returns filed by prisoners. The IRS must
have a current and accurate prisoner file to alert CI to prisoner-filed
returns. An improved prisoner file would also enable the IRS Submission
Processing function to stop false prisoner refunds on those returns
that do not meet CI criminal investigative criteria before they are
issued. If Congress were to require Federal and State prisons to
provide accurate Social Security Numbers and other prisoner information
in a consistent format, the IRS could obtain the information much later
in the year and include it in the prisoner database for the upcoming
tax season. This improvement to information quality would help prevent
prisoners from bilking the Government out of millions of dollars.
Conclusion
Mr. Chairman and members of the subcommittee, I appreciate the
opportunity to discuss this important tax administration issue today.
As I stated initially, our review of the extent of prisoner fraud and
the effectiveness of IRS efforts to prevent it is still ongoing, but we
will continue to work with the IRS and this subcommittee as we near
completion. I will be happy to answer any questions you have at the
appropriate time.
Chairman RAMSTAD. Thank you very much, Mr. Inspector
General. The Chair now recognizes Mr. Moriarty, please.
STATEMENT OF JOHN M. MORIARTY, INSPECTOR GENERAL, TEXAS
DEPARTMENT OF CRIMINAL JUSTICE, AUSTIN, TEXAS
Mr. MORIARTY. Mr. Chairman and Members of the Committee,
thank you very much for the privilege of allowing me to testify
here today on the matter of inmate income tax fraud. My office
initially became aware of the problem in the mid-eighties, and
it has been conducting criminal investigations inside the walls
of the Texas prisons since that time. I believe that in order
to fully appreciate the challenge that the State systems face,
you must understand how large the State penal systems are.
Texas has 151,000 inmates incarcerated in 105 secure
facilities. New York, Florida, and California are large systems
also, with similar size issues. There is a common false belief
that when a person is incarcerated, they stop committing crime.
Law enforcement investigators who operate inside the State
prisons have a very difficult job. Unlike free-world criminal
investigators, the prison criminal investigator is dealing
daily with hard-core, street-smart convicts in most of his
investigations.
The inmate income tax scam is a very simple crime to
perpetrate. All that is needed is a few simple items: forms W-2
and 1040, a valid tax ID number, and a prison law library
typewriter. The other half of the scam involves the recruitment
of someone who can open post office boxes, cash the returns,
and divide up the proceeds to the inmate trust fund, and
whoever else may be involved in the scheme. The inmates, prior
to Texas implementing procedures to combat this problem,
referred to what happened next as ``it was raining money.'' In
one case we tracked some of the proceeds to an offshore account
that we believed contained over $1 million. Those funds were
never recovered. Once the inmates learn the scheme, it is like
a virus; it spreads quickly. It is my experience that the money
obtained in these schemes is used to further the inmates
trafficking in drugs, cell phones, and other contraband within
the prison. In several cases we investigated, we found that
Members of the correctional staff were corrupted and had been
actively participating in the schemes.
When we initially began investigating cases in the mid-
eighties, we were surprised to learn how easy it was to defraud
both the Federal and State income tax systems Early on in our
investigations we identified as many as 400 inmates in the
Texas system actively filing false Federal income tax returns.
This information developed by recovering documents from
suspects and investigative interviews, not from an IRS source.
As you can imagine, this was a massive drain on our
investigative resources. We immediately sought help from the
IRS in investigating these cases. Our requests for IRS
investigative assistance were initially denied. A few years
later, approximately 30 inmates were Federally indicted by the
IRS, once the magnitude of the problem was realized. It was our
understanding that our initial request did not meet the dollar
threshold that was in place at that time by the IRS. The second
and most important issue was the inability of the IRS to share
their information. I do understand that the law does not permit
them to disclose taxpayer information to law enforcement. This
is a major handicap to the successful investigation of these
fraudulent activities.
An example of how it hinders successful investigations
occurred this month in an active Federal income tax fraud case
that my office initiated. An Office of the Inspector General
(OIG) investigator developed an inmate informant that was
willing to work with him and the IRS as an informant in an
undercover capacity. The informant had been solicited by
another inmate to participate in an identity theft and tax
fraud scheme. The utilization of inmates as informants has
major safety implications that most investigators who operate
in the free world do not understand or deal with in their work
with informants. That is one reason why a team approach of IRS
and prison criminal investigators who are familiar with working
informants in correctional settings is imperative to a
successful and safe operation. In this case, IRS responded
promptly and the investigation began. The case involved co-
conspirators in the free world as well as incarcerated
offenders. The OIG investigator requested information from the
IRS investigation; however, because of both IRS policy and
Federal income tax law, the IRS investigation was unable to
share that information with the OIG investigator. The IRS
investigator was just doing his job as prescribed by law.
It is my understanding that the IRS is currently
investigating 250 possible cases of income tax fraud being
allegedly perpetrated by inmates in Texas. My office has only
one active case opened at this time. It would be beneficial to
my office, as well as all taxpayers, to determine whether the
inmate suspects are committing these crimes when they are in
the custody of the State of Texas, Federal custody, or in
county jails. We have implemented steps to mitigate the inmates
from continuing this scheme. Inside the prisons of Texas, we
have made tax forms a contraband item. Texas prison officials
do realize that in certain circumstances inmates have to file
returns; however, they can only possess one return form with
the permission of the prison administration. The second step
that was taken was to supply IRS with the names of all 151,000
persons currently incarcerated in the Texas prison system.
This, of course, does allow IRS to flag those returns. The only
drawback to this is that if the IRS identifies an inmate that
is engaging in this criminal activity, they are prohibited from
informing my office. A cooperative effort is necessary to be
successful in combating this problem. Mr. Chairman, I thank you
again for this opportunity and would be happy to take questions
that you might have.
[The prepared statement of Mr. Moriarty follows:]
Statement of John M. Moriarty, Inspector General, Texas Department of
Criminal Justice, Austin, Texas
Mr. Chairman and members of the committee, thank you very much for
the privilege of allowing me to testify here today on the matter of
inmate income tax fraud. My office initially became aware of the
problem in the mid eighties and has been conducting criminal
investigations inside the walls of Texas State prisons since that time.
I believe that in order to fully appreciate the challenge that state
systems face, you must to understand how large the state penal systems
are. Texas has 151,000 inmates incarcerated in 105 secure facilities.
New York, Florida, and California are large systems also, with similar
size issues. There is a common false belief that when a person is
incarcerated they stop committing crime. Law enforcement investigators
who operate inside of the state prisons have a very difficult job.
Unlike free world criminal investigators, the prison criminal
investigator is dealing daily with hard-core, street-smart convicts in
most of his investigations.
The inmate income tax scam is a very simple crime to perpetrate.
All that is needed is a few simple items: IRS forms W-2 and 1040, a
valid tax ID number, and a prison law library typewriter. The other
half of the scam involves the recruitment of someone who can open post
office boxes, cash the returns, and divide up the proceeds to the
inmate trust fund and whoever else may be involved in the scheme. The
inmates, prior to Texas implementing procedures to combat this problem,
referred to what happened next as ``it was raining money.'' In one case
we tracked some of the proceeds to an offshore account that we believed
contained over one million dollars. Those funds were never recovered.
Once the inmates learn the scheme, it is like a virus; it spreads
quickly. It is my experience that the money obtained in these schemes
is used to further the inmates trafficking in drugs, cell phones, and
other contraband within the prison. In several cases we investigated,
we found that members of the correctional staff were corrupted and had
been actively participating in the schemes.
When we initially began investigating cases in the mid-eighties we
were surprised to learn how easy it was to defraud both the federal and
state income tax systems. Early on in our investigations we identified
as many as 400 inmates within the Texas system actively filing false
federal income tax returns. This information developed by recovering
documents from suspects and investigative interviews, not from an IRS
source. As you can imagine this was a massive drain on our
investigative resources.
We immediately sought help from the IRS in investigating these
cases. Our requests for IRS investigative assistance were initially
denied. A few years later approximately 30 Texas inmates were federally
indicted by IRS once the magnitude of the problem was realized. It was
our understanding that our initial request did not meet the dollar
threshold that was in place at that time by the IRS. The second and
most important issue was the inability of the IRS to share their
information. I do understand that the law does not permit them to
disclose taxpayer information to law enforcement. This is a major
handicap to the successful investigation of these fraudulent
activities.
An example of how it hinders successful investigations occurred
this month in an active federal income tax fraud case that my office
initiated. An OIG investigator developed an inmate informant that was
willing to work with him and the IRS as an informant in an undercover
capacity. The informant had been solicited by another inmate to
participate in an identity theft and tax fraud scheme. The utilization
of inmates as informants has major safety complications that most
investigators who operate in the free world do not understand or deal
with in their work with informants. That is one reason why a team
approach of IRS and criminal investigators who are familiar with
working informants in a correctional setting is imperative to a
successful and safe operation.
In this case IRS responded promptly and the investigation began.
The case involved co-conspirators in the free world as well as
incarcerated offenders. The OIG investigator requested information from
the IRS investigator however; because of both IRS policy and federal
tax law, the IRS investigator was unable to share that information with
the OIG investigator. The IRS investigator was just doing his job as
prescribed by law.
It is my understanding that the IRS is currently investigating 250
possible cases of income tax fraud being allegedly perpetrated by
inmates. My office has only one active case opened at this time. It
would be beneficial to my office, as well as all taxpayers, to
determine whether the inmate suspects are committing these crimes when
they are in the custody of the state of Texas, federal custody, or in
county jails.
We have implemented steps to mitigate the inmates from continuing
this scheme. Inside the prisons of Texas we have made tax forms a
contraband item. Texas prison officials do realize that in certain
circumstances inmates do have to file returns, however they can only
possess one return form with the permission of the prison
administration. The second step that was taken was to supply IRS with
the names of all of 151,000 persons currently incarcerated in the Texas
prison system. This of course does allow IRS to flag those returns. The
only drawback to this is that if the IRS identifies an inmate that is
engaging in this criminal activity they are prohibited from informing
my office. A cooperative effort is necessary to be successful in
combating this problem.
Mr. Chairman, I thank you again for this opportunity. I would be
happy to take any questions you might have.
Chairman RAMSTAD. Thank you, Mr. Moriarty. The Chair now
recognizes Mr. Bentley, please, for your testimony.
STATEMENT OF JEFF BENTLEY, CRIMINAL INVESTIGATOR, SOUTH
CAROLINA DEPARTMENT OF CORRECTIONS, COLUMBIA, SOUTH CAROLINA
Mr. BENTLEY. Thank you, Mr. Chairman and Members of the
Committee.
Chairman RAMSTAD. Sir, excuse me. I do not think your
microphone is on.
Mr. BENTLEY. Thank you, Mr. Chairman and Members of the
Committee. Tax fraud by inmates has steadily increased year to
year since my first knowledge of the scheme in 2000 until
present. The most significant increases were in 2002 and 2005.
Our division has received information of tax fraud in varying
degrees from every maximum security institution in the State as
well as some medium security facilities. The overall fraud has
increased from a few dozen in the early stages to several
thousand at present. The scheme has fed on itself in that
inmates have realized that they can receive thousands of
dollars of ``free money'' without the threat of being detected
for months or even years. By the time the fraud is detected,
the money has long been spent. There also is very little threat
of prosecution for most inmates. The vast majority of the money
received by inmates is used in the drug trade. Illegal drug use
is an ongoing problem in prison systems nationwide. Some money
is used by simple addicts for their own habits, while some is
used to form or expand illegal drug-trafficking rings.
Connected with the drug rings are assaults and extortion over
territory, or unpaid debts. Unfortunately, some of the money is
used to lure employees into illegal activity.
The methods that inmates use have some common
characteristics but may vary from group to group. Generally,
either one inmate or a small group of inmates will be the head
of the ring. They will have one or more inmates who are
responsible for actually filling out the returns. The ring
leaders will then recruit inmates to participate by offering to
file a return in their name. The ring leaders receive varying
amounts of the refund, from a few hundred dollars to half the
face amount, and the inmate supplying the information receives
the remainder of the return. In some cases the inmate providing
the information must supply an account number and routing
number for direct deposit. In many rings, the ring leaders have
the funds deposited directly into accounts they have set up on
the outside in order to assure they are paid their cut.
Generally, the ring leaders provide the blank forms and the
information for a W-2. Once they get those numbers, they may
use that information on many returns. Some rings have been
found to have a set of figures and information down to the
penny where all that is needed is the personal information to
be ``plugged in'' for a completed return. Once the returns are
completed, most are smuggled out through visitation or by other
means.
Once a refund has been received, cash is smuggled back into
the institutions through visitation or laundered through the
inmate's family and friends. Often the money never comes back
as cash but is used to purchase drugs or other contraband. Cell
phones are common contraband because they can be used to
operate drug rings inside and outside the institutions without
being monitored. Also, inmates can contact each other within an
institution where they normally would be segregated as well as
contact inmates at other institutions. The potential threat to
security is staggering. Ironically, most rings have one inmate
who uses a cell phone to contact the IRS to check on the status
of returns they have filed. Again, that information is vital so
that all parties can assure they are being paid properly. Drug
credit is often extended based on that information.
Since tax fraud schemes have flourished, we have
implemented measures to help combat the problem as much as
possible. Incoming and outgoing mail is now monitored more
closely. Telephone calls of potential suspects are monitored.
All tax forms and related materials are considered contraband
whether blank or filled out. Inmates who have legitimate
returns--either through being employed by Prison Industries,
new arrivals, or have income from the outside--are required to
contact the administration at their institutions who have
designated staff Members to assist in proper filing of their
returns. When an inmate is found to be in possession of
contraband tax forms, he is charged administratively and may
face punishments ranging from administrative segregation,
custody reduction, loss of earned good time, and/or loss of
privileges. All information gathered is referred to the IRS
investigators for possible criminal prosecution. According to
information I have received, only a very small number of
individuals have been successfully prosecuted.
Although the total costs of inmate tax fraud to our agency
will never be completely known, there have been measurable
costs. The IRS stated that Evans Correctional Institution had
the second largest number of fraudulent returns based on their
prisoner database information. This information was not
revealed to us until a few days ago. In late 2004, Evans
Correctional Institution was placed on total lockdown due to
rampant criminal behavior. The amount of contraband drugs,
cash, and other contraband such as cell phones being
confiscated was phenomenally high, as were allegations of
employee misconduct. For a period of approximately 2 months,
Evans Correctional Institution staffing was at least doubled,
and at times more, in an effort to bring the situation under
control. The extra staff was provided by other institutions
from throughout the State. When figuring man-hours worked,
overtime by detached officers, overtime by the detached
officers' home institutions to cover their absence, and
transportation for those officers, the financial burden on our
agency was catastrophic. Bear in mind that South Carolina
operates our Department of Corrections on a budget of
approximately $12,170 per inmate per year. That budget is
reported to be the lowest inmate cost in the Nation.
A vast amount of information is given to the IRS every tax
year concerning tax fraud. Virtually nothing is given to us in
return. Once it is determined that the information has been
used to file a tax return, the IRS then deems it to be
``confidential taxpayer information.'' Once the information is
turned over, our agency has no idea what happened or if it is,
in fact, a fraudulent return. Was a refund issued or was it
stopped in time? Where did the money go? Are there going to be
prosecutions? Do I need to worry about the informant's safety?
The confidentiality rules to normal citizens should not apply
to inmates committing fraud.
I am sure the solution to this problem is much more
complicated than I understand. Why not have a database of
inmate information, updated each month, of all inmates
incarcerated in their systems? Have the IRS computers flag all
of this information and pull those returns before a refund is
issued; examine those returns closely; process the legitimate
returns and notify the States of fraudulent ones. In due time,
when inmates realize it doesn't work anymore, they will quit
trying so often. Of course, some will continue to try. I
contend that no threat of prosecution is going to stop the
fraud. The system must be fixed where it just will not work.
Thank you.
[The prepared statement of Mr. Bentley follows:]
Statement of Jeff Bentley, Criminal Investigator, South Carolina
Department of Corrections, Columbia, South Carolina
INTRODUCTION
I am a Criminal Investigator employed by the South Carolina
Department of Corrections, Division of Investigations and have been so
employed for 13 years. I have a total of over 25 years of Law
Enforcement and Investigative experience. It is the primary duty of our
division to investigate criminal violations within, and connected to,
our prison system.
PRISON TAX FRAUD IS A SIGNIFICANT PROBLEM
Tax fraud by inmates has steadily increased year to year from my
first knowledge of the scheme in 2000 until present. The most
significant increases were in 2002 and 2005. Our division has received
information of tax fraud in varying degrees from every maximum security
institution in the state as well as some medium security facilities.
The overall fraud has increased from a few dozen in the early stages to
several thousand at present. The scheme has fed on itself in that
inmates have realized they can receive thousands of dollars of ``free
money'' without the threat of being detected for months or even years.
By the time the fraud is detected, the money has long been spent. There
also is very little if any threat of prosecution for most inmates. Many
have life sentences or very long sentences which makes federal
prosecutors reluctant to spend the money to prosecute inmates who very
well may not ever be released anyway.
WHERE THE MONEY GOES
The vast majority of the money received by the inmates is used in
the drug trade. Illegal drug use is an ongoing problem in prison
systems nation wide. Some money is used by simple addicts for their own
habits while some is used to form or expand illegal drug trafficking
rings. Connected with the drug rings are assaults and extortion over
territory or unpaid debts. Unfortunately, some of the money is used to
lure employees into illegal activity. While some employees would not be
tempted to risk termination and arrest for $100, they may be swayed if
the amount is several times that amount. The drug dealers and tax
preparers now have that extra money to spend.
HOW PRISON TAX FRAUD OCCURS
The methods that inmates use have some common characteristics but
may vary from group to group. Generally, either one inmate or a small
group of inmates will be the head of the ring. They will have one or
more inmates who are responsible for actually filling out the returns.
The ring leaders will then recruit inmates to participate by offering
to file a return in their name. The ring leaders receive varying
amounts of the refund (from a few hundred dollars to half the face
amount) and the inmate supplying the information receives the remainder
of the return. In some cases the inmate providing the information must
supply an account number and routing number for direct deposit. In many
rings, the ring leaders have the funds deposited directly into accounts
they have set up on the outside in order to assure they are paid their
cut. Generally, the ring leaders provide the blank forms and
information for a W2. They receive state and federal employer
identification numbers from sources outside. Once they get those
numbers, they may use that information on many returns. Some rings have
been found to have a set of figures and information down to the penny
where all that is needed is the personal information to be ``plugged
in'' for a completed return. Once the returns are completed, most are
smuggled out through visitation or by other means. Institutional mail
rooms will not mail sealed envelopes without checking the contents for
contraband. It should be noted that although most returns bear inmate
information, some are surfacing which contain non-inmate data. Some of
those have been traced to inmate families, others are unknown. At least
one Jury List has been located which an inmate received through
discovery at his trial. The list contained Social Security Numbers
which could be used to file false returns. Once a refund has been
received, cash is smuggled back in to the institutions through
visitation or laundered through the inmate's family and friends. Often,
the money never comes back as cash but is used to purchase drugs or
other contraband. Cell phones are common contraband because they can be
used to operate drug rings inside and outside the institutions without
being monitored. Also, inmates can contact each other within an
institution where normally they would be segregated as well as contact
inmates at other institutions. The potential threat to security is
staggering. Ironically most rings have one inmate who uses a cell phone
to contact the IRS to check the status of returns they have filed.
Again, that information is vital so that all parties can assure they
are being paid properly. Drug credit is often extended based on that
information.
WHAT WE DO AS AN AGENCY TO COMBAT THE FRAUD
Since the tax fraud schemes have flourished, we have implemented
measures to help combat the problem as much as possible. Incoming and
out going mail is now monitored more closely. Telephone calls of
potential suspects are monitored. All tax forms and related materials
are considered contraband whether blank or filled out. Inmates who have
legitimate returns (either employed through Prison Industries, new
arrivals, or have income on the outside) are required to contact the
administration at their institutions who have designated staff members
to assist in proper filing of their returns. When an inmate is found to
be in possession of contraband tax forms, he is charged
administratively and may face punishments ranging from Administrative
Segregation (lock-up), custody reduction, loss of earned good time,
and/or loss of privileges. All information gathered is referred to the
IRS investigators for possible criminal prosecution. According to
information I have received, only a very small number of individuals
have been successfully prosecuted.
WHAT THE COSTS HAVE BEEN TO OUR AGENCY
Although the total costs of inmate tax fraud to our agency will
never be completely known, there have been measurable costs. The
Internal Revenue Service stated that Evans Correctional Institution had
the second largest number of fraudulent returns based on their prisoner
database information. This information was not revealed to us until a
few days ago. In late 2004, Evans Correctional Institution was placed
on total lockdown due to rampant criminal behavior. The amount of
contraband drugs, cash, and other contraband such as cell phones being
confiscated was phenomenally high as were allegations of employee
misconduct. For a period of approximately two months, Evans CI staffing
was at least doubled, and at times more, in an effort to bring the
situation under control. The extra staff was provided by other
institutions from throughout the state. When figuring man hours worked,
overtime by the detached officers, overtime by the detached officers'
home institutions to cover their absence, and transportation for those
officers, the financial burden on our agency was catastrophic. Bear in
mind that South Carolina operates our Department of Corrections on a
budget of approximately $12,170 per inmate, per year. That budget is
reported to be the lowest per inmate cost in the nation. For
comparison, our neighboring state of Georgia spends approximately
$18,500 per inmate, North Carolina approximately $23,000 per inmate and
the Federal Bureau of Prisons close to $30,000 per inmate.
WHAT WE NEED TO HELP DETER INMATE TAX FRAUD
The above question can be answered in part by one word . . .
``cooperation.'' A vast amount of information is given to the IRS every
tax year concerning inmate tax fraud. Virtually nothing is given to us
in return. Once it is determined that the information has been used to
file a tax return, the IRS then deems it to be, ``confidential taxpayer
information.'' Once the information is turned over, our agency has no
idea what happened to it or if it is in fact a fraudulent return. Was a
refund issued or was it stopped in time? Where did the money go? Are
there going to be prosecutions? Do I need to worry about my informant's
safety? The confidentiality rules to normal citizens should not apply
to inmates committing fraud. If we could acquire this information, we
could punish the responsible inmates administratively whether they are
prosecuted criminally or not. That may serve as a deterrent to some
extent.
POSSIBLE SOLUTIONS
I'm sure the solution to this problem is much more complicated than
I understand. Why not have a database of inmate information, updated by
each state monthly, of all inmates incarcerated in their systems? Have
the IRS computers flag all of this information and pull those returns
BEFORE A REFUND IS ISSUED. Examine those returns closely. Process the
legitimate returns and notify the states of the fraudulent ones. In due
time, when inmates realize it doesn't work anymore, they will quit
trying as often. Of course, some will continue to try. I contend that
no amount of threats of prosecution is going to stop the fraud. The
system must be fixed where it just won't work.
ACKNOWLEDGEMENT
I must acknowledge Special Agent Russell Sciandra, Jr. of the IRS
Columbia, South Carolina Field Office. Several agents have come and
gone as a result of promotions and reassignments over the past few
years, but Agent Sciandra has been vigilant in his investigation since
the beginning. I cannot recall an instance when he has failed to return
a telephone call. I feel that he has learned a great deal about inmate
tax fraud and probably has the best ideas about how to deal with it. Of
course, he is not at liberty to discuss those ideas due to
confidentiality rules within his agency. I, on the other hand, have
learned a great deal about bureaucracy.
Chairman RAMSTAD. Thank you, Mr. Bentley. The Chair thanks
all four Members of this distinguished panel for your very
helpful testimony, and I would like to ask first Ms. Jardini,
you testified that the IRS detected over 18,000 cases of fraud
by prison inmates last year alone. Is that correct?
Ms. JARDINI. That is correct.
Chairman RAMSTAD. Even when the IRS detects inmate tax
refund fraud, I understand that the IRS fails to stop the
refund checks from being issued in 20 percent of the cases,
only 20 percent of the cases. Why is that?
Ms. JARDINI. Well, let me give you the scope of the
problem. We received and reviewed in our Fraud Detection
Centers in 2004 106 million refund returns last year. It is a
fine balancing act between identifying the fraud quickly and
stopping the refund and getting the overwhelming majority of
legitimate refunds out to deserving taxpayers expeditiously. We
have between 10 days and 3 weeks to get those returns out, and
we look at them as quickly as possible within our Fraud
Detection System to ensure that we identified bad returns and
stop them. Our rate of success, while we would like to improve
on 80 percent, is significant given the challenges that we
face. Nonetheless, within that process, the fact that we do not
have accurate prisoner data is a significant challenge to us in
identifying these returns and stopping them more quickly.
Chairman RAMSTAD. Let me ask you, before I get into the
confidentiality problem that you face, how many of the 18,000
cases detected last year were prosecuted?
Ms. JARDINI. Well, let me say in terms of prosecution, that
is a little bit out of our control. Last year, we referred 500
of these fraudulent refund cases--that is 500, not solely
prisoner cases, but 500 investigations--to our field offices
for further investigation.
Chairman RAMSTAD. So, 500 of the 18,000 cases?
Ms. JARDINI. Five hundred investigations of the 122,000
overall fraud refund returns were referred to our field offices
for prosecution. With respect to the prisoner cases, currently
in our field offices we have somewhere between 100 and 200
ongoing investigations, but I have to tell you that these cases
are not terribly attractive for criminal prosecution. When you
consider--and this is not by any means a criticism of the
Department of Justice, but when you consider that their limited
resources are deployed to counterterrorism, corporate fraud,
narcotics, general crimes and violent crimes, putting a
prisoner who is sitting in a South Carolina prison for 25 years
in prison, and using prosecutorial resources for that type of
investigation, is not at the top of their list of priorities.
In an instance like Prisoner Doe, where you had an inmate who
was prepared to be released in 2007, who was a serial offender
who had a significant amount to lose, that is exactly where our
prosecutorial resources and investigative resources should be
targeted.
Chairman RAMSTAD. Well, Ms. Jardini, with all respect, I
understand priorities as a Member of Congress, but I think
every taxpayer I know would be outraged to learn that Inmate
Doe grossed $3.5 million from taxpayer refund fraud. It seems
to me that more needs to be done than just to say, ``It is not
a priority.''
Ms. JARDINI. I completely agree with you, sir, and believe
me, Mr. Chairman, I am not saying it is not a priority. I am
saying it is not a priority necessarily for criminal
prosecution. I believe that all of my panel Members would agree
that increased criminal prosecution in this arena is not the
answer. The answer is allowing us to work more effectively with
the States to provide--we have 118,000 pieces of evidence on
criminal fraud related to people who are sitting in their
prisons, and we cannot tell them about it. They cannot apply
administrative remedies, which I believe even Prisoner Doe
admitted was more effective than criminal prosecution for long-
term hard-timers. So, I am not saying it is not a priority. I
am saying criminal prosecution is not necessarily the answer.
Chairman RAMSTAD. Thank you for recognizing my flawed
example because my reference to Inmate Doe was a bad one
because he was prosecuted. He was one of the few that was
prosecuted. In your judgment, would more prosecutions happen if
you were able to share information with prison officials at the
State level?
Ms. JARDINI. Targeted criminal prosecutions are important
in the instance of serial offenders and high-level offenders,
particularly those who may be released in the near future. What
we would hope to accomplish by being able to share this
information with the States would be their ability to impose
administrative sanctions within the prison. Frankly, to someone
serving life, his cigarettes and his chocolate bar are probably
more important to him than whether we tack on an additional 60
months to his sentence.
Chairman RAMSTAD. Under present law, you are totally
prohibited from sharing information about those cases with the
State prison officials; is that right?
Ms. JARDINI. That is correct.
Chairman RAMSTAD. Let me just ask you, Mr. George, before I
recognize the Ranking Member, if you have any comments on that
line of questioning.
Mr. GEORGE. Yes, Mr. Chairman. You have competing interests
in terms of Internal Revenue Code section 6103. One, you want
to assure honest taxpayers that the information they provide to
the Federal Government will be protected and not shared in a
way that would be adverse to them. At the same time, the
situation, as your hearing is describing, shows that indeed
there is a need to share information relating to taxpayer
malfeasance in many instances. As Nancy Jardini noted, with
very limited exceptions, the sharing of information between
Federal and State officials is not allowed.
Chairman RAMSTAD. The Chair again thanks you for your
responses and does not mean to slight Mr. Moriarty or Mr.
Bentley. I am sure other Members of the panel will have
questions for you gentlemen. The Chair would now recognize Mr.
Lewis.
Mr. LEWIS. Thank you very much, Mr. Chairman, and let me
thank each Member of the panel for being here. Ms. Jardini,
does the IRS send refund checks directly to the prison address?
Or are most of the refund checks sent outside of the prison? Or
would you have that type of information?
Ms. JARDINI. Well, they ask for all of those things. They
ask for them to be sent to the prison. They ask for them to be
sent to outside addresses. They ask for electronic funds
transfers both to prison accounts and outside accounts. So,
prisoners are seeking all of that. We do our best not to send
them out at all, but with respect, particularly to prison
addresses, some States--for example, South Carolina--have been
very vigorous in ensuring that we have the appropriate
information we need to be able to identify those addresses and
stop them.
Mr. LEWIS. Maybe you responded to the Chairman's question
and gave an answer, but I want to come back and try to ask the
question in a different way, maybe to get a little more
information. What type of information is not in the IRS
prisoner database which would help identify bogus returns filed
by inmates?
Ms. JARDINI. There are two big problems with the prisoner
database. One is that prisoners, as they enter the facility, do
not always give accurate data to the prison officials, and
because the prison officials do not have an immediate need to
verify it, we frequently get that inaccurate data. That is one
problem. The second problem is that each of the 50 States
maintains these systems and this identifying data in a
different format, so it is extremely time-intensive for us in
our Fraud Detection Centers to get this information and then
put it into a format that is readable and searchable in our own
system. As a consequence, it is the disparate forms of data
that we receive as well as the inaccurate data that we receive
that presents the biggest impediments with relation to the
prisoner file.
Mr. LEWIS. In recent years, has there been a conference,
maybe just some meeting, a regional meeting, a nationwide
meeting, between officials of the IRS and State correction and
Federal correction officials?
Ms. JARDINI. Yes, sir. We met regularly with individual
State prison authorities in the first half of this year,
particularly in the States where we are seeing dramatic growth
in the fraud: Florida, South Carolina, Texas, California. We
meet, both our National officials as well as our local
officials, including our special agents in charge who are
investigative leaders out in the field, as well as the regional
leaders of these Fraud Detection Centers, are meeting with
their local prison authorities to attempt to address some of
the problems we are having.
Mr. LEWIS. Thank you. Mr. George, how does tax fraud by
prisoners compare to other types of tax fraud?
Mr. GEORGE. In terms of the comparison, it occurs both
within the prison system and outside of it. Mr. Lewis, we are
in the process now of doing an extensive review of this
situation, and in order to give a more complete response, if I
may supply that answer for the record.
[The information is being retained in the Committee files.]
Mr. LEWIS. I would appreciate it. Is there a big difference
or some greater scheme on the part of the people in prison than
those on the part of people on the outside engaging in tax
fraud? Tax refund fraud, I should say.
Mr. GEORGE. I may defer to Nancy Jardini, but allow me to
say at this time that there is no question that many
individuals who are incarcerated have a lot of free time on
their hands.
Mr. LEWIS. Well, do you think that people that are
incarcerated, maybe they learned a great deal of this before
they got into prison, that this was a way of life before they
got in?
Mr. GEORGE. I would agree with that. Yes, Mr. Lewis.
Mr. LEWIS. So, it is not something that they discovered
when they became an inmate.
Mr. GEORGE. Again, we are surmising this, but I would agree
with that statement.
Ms. JARDINI. Mr. Lewis, let me tell you that in answer to
your first question, of the overall refund population of all
citizens who file for refunds, less than 1 percent of those are
fraudulent. Of the prisoner refund population, more than 4
percent of those are fraudulent. So, we are seeing a greater
rate of fraud in the prisoner population, which is why we
devoted additional resources to it. Obviously, the problem with
prisoners is, first of all, we are dealing with a population
with a proclivity to lie and steal, frankly. These are
criminals at base. Second, they are housed in a manner that
fosters communication about fraud schemes in a much more
effective way because of their close quarters and their
constant contact. We believe those are the primary reasons why
we are seeing such growth in that area.
Mr. LEWIS. I notice my time is up, but, Mr. Chairman, if
you will bear with me for a moment, Mr. George, what are the
States nationwide doing to deal with prisoner tax fraud?
Mr. GEORGE. First and foremost, again, if you send a
message that people can bilk the system, you are sending a
message that no one wants spread throughout the Nation: that
you can get away with cheating on your taxes. Then the message
esssentially is sent that people who are already incarcerated
for committing other crimes are able to do this seemingly with
impunity. That is just the wrong message that we would want to
send, Mr. Lewis.
Mr. LEWIS. It sounded like John Doe got 5 years for Federal
tax fraud added to his existing 5-year sentence for Federal
bank fraud, but to be served concurrently. How did the Federal
tax charge hurt him? It seems like he got no additional jail
time. Am I misreading that somewhere?
Mr. GEORGE. I do not believe you are misreading it. Keep in
mind, as Ms. Jardini noted, out of 14,000 fraudulent prison
returns stopped last year, thus far this year only 312 have had
investigations initiated. Those numbers are a drop in a bucket.
More needs to be done. As Ms. Jardini noted, this is not a high
priority for U.S. attorneys because of the lack of resources.
Again, as was noted earlier, for people who are spending life
in jail, how much more can you do to them? It is a complicated
issue, and that is why, again, I want to thank Mr. Ramstad and
all the Members of this Committee. This is an extraordinarily
important issue that you raised that has prompted my office to
engage in this extensive investigation. I understand this has
prompted the Criminal Investigations division to do more
extensive research, and we hope to have a substantive report
back to you shortly.
Mr. LEWIS. Thank you.
Thank you very much, Mr. Chairman.
Chairman RAMSTAD. Thank you, Mr. Lewis. The Chair
recognizes Mr. Beauprez.
Mr. BEAUPREZ. I thank the Chairman and I thank our panel
for being with us today. You are right, Mr. George; it is, I
think, obviously an important issue, one I hope we can get our
arms around soon. Just to frame the magnitude of the challenge
in front of us, let me go down some of the numbers track again,
if I might, Ms. Jardini. About 130 million tax returns are
filed; is that correct?
Ms. JARDINI. That is correct, in 2004.
Mr. BEAUPREZ. How many refunds, again?
Ms. JARDINI. One hundred and six million refunds returns.
Mr. BEAUPREZ. Almost all of them.
Ms. JARDINI. Yes.
Mr. BEAUPREZ. Eighty-some percent, I guess that is. A
massive number, which speaks to the complexity, I guess, of the
Tax Code. Another issue that is in front of this Committee is
addressing tax simplification, so we give you an enormous
problem. You have already identified repeatedly--actually, both
you and Mr. George--the need for administrative reform. I am
going to guess--and I want to get your answer on the record--
that that is both tax fraud that is committed within the prison
system, which is what we are talking about today, but also
outside the prison system. I think, Mr. George, you commented
on that a moment ago. Do you care to comment more extensively?
Mr. GEORGE. I would say your statement is correct, and I
would also note that, again, many of the people who are
involved who are incarcerated in these types of schemes do have
the assistance of people outside of the prison system, as was
noted by the testimony of Mr. Doe on the earlier panel.
Mr. BEAUPREZ. That is exactly where I would like to go with
Mr. Moriarty and Mr. Bentley. If we went at this problem from
purely a prosecutorial point of view, after it happens we go
chase it--which I am not suggesting we should not do that.
Obviously we need to, but if we did a really good job of that,
might we just push the problem outside the prison walls to
their co-conspirators?
Mr. BENTLEY. Prosecution is a threat to the co-conspirators
on the outside because they cannot get the money back at the
institutions. It has to go somewhere outside, and somebody
outside has to set that up.
Mr. BEAUPREZ. So, they essentially always have a partner.
Mr. BENTLEY. Certainly.
Mr. MORIARTY. Yes.
Mr. BEAUPREZ. So, in kind of following this circle, at
least in my mind, it goes right back to preemption, making it
more and more and more difficult to perpetrate in the first
place. Inmate Doe said rather emphatically that he thought the
form, the ease of the form--and we all like that. I guess we
have been operating on the honor system. Is there merit in what
he suggested in somehow creating a unique form? I used to be in
the banking business, and one of the safeguards we had in
counterfeiting our currency was that it is pretty unique. So he
mentioned a unique form. He also mentioned the possibility in
this day and age we live in of biometrics somehow being entered
into it. What is the feasibility, in your opinion, of going
down that path?
Mr. GEORGE. Mr. Beauprez, when I first heard Mr. Doe
mention that, it struck a chord. I thought, wow, that is a
rather interesting concept, but having a brief discussion with
my staff here, and then thinking about it further, you again
have competing interests here. What the Federal Government is
attempting to do is enhance voluntary compliance. In order to
do so, you want to make it as easy as possible for people to
report the amount of tax that is owed. When you try to balance
that with making it harder to duplicate these devices, again,
these are competing interests that this body needs to consider.
Mr. BEAUPREZ. So, one of the other big suggestions, I
think, that has come out of this collective dialog today is the
sharing of information. I want to close in the little time I
have with both of the gentlemen from Texas and South Carolina
and ask you: Would the States embrace that, or are the States,
if there was more of a standardized policy, procedure, almost a
mandated--I will use that word--cooperative relationship,
again, with the Federal Government and the States, would they
see that as helpful in this situation? Or perhaps is it yet
another Federal mandate that you say here comes another burden
on us?
Mr. MORIARTY. I definitely think the sharing of that
information is critical to us putting a stop in it. Again, to
back up what was said earlier about the prosecution remedies,
that is not going to solve the problem itself. If we know that
an inmate is committing that fraud, we can look at him--in the
eighties when we first started looking at this, we would go
into cells and find 100 W-2 forms and 10forties. We do not
allow them to copy anything. We do not allow them to possess
the forms now. I think we have got a big responsibility to
enforce that on our end, but in order to keep a closer eye,
like in the cases reported that there are 250 cases they are
looking at in Texas, I surely would like to know who those 250
are out of the 151,000 that I am responsible for.
Mr. BEAUPREZ. That seems rather obvious. Mr. Bentley, if I
could beg some forgiveness from the Chairman, would you care to
add to that?
Mr. BENTLEY. Yes, sir. We would be able to handle a lot
more of the investigations and be able to punish the inmates
administratively, even if they are not going to be prosecuted
criminally, we would be able to do something to them. It has
got to be where it is not appealing anymore. Right now, as Mr.
Moriarty said, it is raining money. The problem that it causes
is the crimes that stem from free money, and that is the point,
as I look at it, and as far as the agency is concerned, the
overall amount of money it is costing us. We have to do
something to make it where it is not as appealing.
Mr. BEAUPREZ. I thank all four of you. Thank you for being
here.
Chairman RAMSTAD. Thank you, Mr. Beauprez. The Chair now
recognizes Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman. Ms. Jardini, does the
IRS send refund checks to prison addresses?
Ms. JARDINI. We try not to. As I mentioned earlier, we get
information on the prison addresses, and we do our best to
prevent those from going out. There are instances, if we have
inaccurate information from the prison or if that return was
not filed with a prisoner identification number, a prisoner's
Social Security Number, it might not hit our data mining
tolerances which would alert us to look at that address. So,
anything is possible and it might get out, but we do our best
not to.
Mr. POMEROY. I am no computer whiz, but it would seem like
you could capture the addresses of prisons--it is not an
infinite list--put it into the system and have a trigger if
there is an envelope going to that address.
Ms. JARDINI. Right. Well, our EFDS does recognize addresses
of prisons and other suspicious characteristics. However, it
might not reach--that would not necessarily in and of itself
identify it as a fraudulent return.
Mr. POMEROY. It will not in and of itself end it, but that
is kind of a basic first thing we ought to be able to do that
is going to at least make it more difficult for the defrauders.
Ms. JARDINI. That is right. Well, I do not know what
percentage of these are being mailed out in paper to prisons,
frankly. In fact, as Prisoner Doe pointed out, sending the
money actually to the prison or the prison account is actually
becoming less common.
Mr. POMEROY. Right, but we could make it way less common if
we just electronically dealt with it.
Ms. JARDINI. Right.
Mr. POMEROY. It seems to me, again, that kind of--is that
going on?
Ms. JARDINI. We are engaging in efforts to be more accurate
in that area.
Mr. POMEROY. Now, it would seem to me, I hear you saying
about being able to share information. Certainly, at least as a
prima facie matter, it would seem like there ought to be an
ability to share information much more fully when you detect
fraudulent activity of an incarcerated individual. I do not
know entirely the legal matters of, well, is this an allegation
or is it a proven Federal violation. I have not sorted all that
out yet, but it would seem to me, if nothing else, you could
provide bulk data, non-specific, non-identifying data so you
can tell Mr. Bentley he has got 250 defrauders in there and
tell Mr. Moriarty that he has got 1,000 scattered around the
system, here, there, and everywhere. That would certainly allow
them to deal with the shift and say keep your eyes and ears
open, we know there is a scam going on here. Is that kind of
bulk data provided?
Ms. JARDINI. We are able to provide information about broad
trends or schemes that we are seeing for future fraud
detection. Investigator Bentley has met with our supervisory
special agent and other Members of our leadership team in South
Carolina in an effort to deal with some of these issues. As
they pointed out, they do have data, and we are happy to
provide whatever general data we can provide to them. It is not
specific enough for them to go in and take the action that
would create a deterrent impact.
Mr. POMEROY. No, it does not direct you to a particular
person in a particular cell, but it certainly is, I think,
useful. I would find it useful if you would provide information
to our Subcommittee; identified by State, identified by
facility to the extent that that data is captured the
violations.
Ms. JARDINI. We would be happy to. Absolutely.
[The information is being retained in the Committee files.]
Mr. POMEROY. Mr. Chairman, possibly that information could
be put up on the website that prison officials could access
around the country, give at least a notion in terms of what is
going on.
Chairman RAMSTAD. I think that is an excellent idea.
Mr. POMEROY. Do you have action on identity theft or use of
fraudulent Social Security numbers so that when you do identify
a fraudulent filing, that also contains a fraudulent Social
Security number, that action is followed up?
Ms. JARDINI. Yes, absolutely. Our Fraud Detection Centers
are developing those schemes. That is their primary role, to
find identity theft, false refunds, schemes involving tax
professionals, which is one of our top enforcement priorities
of the Service, identify those, identify the scope of that
scheme, and ensure that that is referred out to a field office
for investigation.
Mr. POMEROY. Great. You mentioned in your testimony the
matter of funding. Do you know what the Service requested by
way of funding for this anti-fraud activity? What was contained
in the budget and what is contained on the floor? I know that
the President's request was not funded, and I believe we come
in about $500 million below the President's request. That is a
lot of anti-fraud policing. Do you know specifically how the
anti-fraud function was funded?
Ms. JARDINI. Yes, I do. In the 2006 budget request the
President requested $10.7 million for this effort, and as I
mentioned previously, it was the only 2006 budget initiative
for the overall Criminal Investigation effort at the IRS, which
is--we have the responsibility to engage in criminal
investigations to create voluntary compliance across the entire
spectrum of hundreds of thousands and millions of taxpayers. I
understand that on the floor that was not funded, but I am not
100 percent certain of that, that $10.7 million figure.
Mr. POMEROY. Right, it was not fully funded. I think it was
funded to the tune of $10.2 billion for a $500 million
shortfall.
Ms. JARDINI. I am sorry. I am referencing strictly the
initiative that would impact this subject matter. In terms of
the overall IRS enforcement budget, I cannot speak to that.
That would have to do with revenue officers and revenue agents
who were doing other----
Mr. POMEROY. It is your belief--and I know my time is up
here. It is your tentative understanding that the requested
funding by the administration to tackle this fraudulent
activity was not funded in the House appropriations activity?
Ms. JARDINI. That is my tentative understanding.
Mr. POMEROY. Mr. Chairman, I would ask that our--I think we
can develop that information in-house. Let's research that one
so that we have a clear idea on the appropriation response to
this problem. I yield back, Mr. Chairman.
Chairman RAMSTAD. Thank you, Mr. Pomeroy. Before adjourning
the hearing, the Chair would just have a couple follow-up
questions. First, to Mr. George, your testimony described ``an
inconsistent and incomplete approach'' by the IRS in addressing
this problem. Is the inconsistent and incomplete approach, as
you call it, by the IRS because there are not adequate
procedures in place to share information with prison officials
at the State level relating to fraud by inmates? Or do taxpayer
confidentiality laws effectively block the IRS from sharing
this information?
Mr. GEORGE. Both of those are factors, and I would add a
third: the requirement for expedited refunds for people who
submit tax returns. You have that factor. In order to comply
with that requirement, the Criminal Investigation unit has a
very limited amount of time in which to determine whether or
not this is a fraudulent return. So, yes, Mr. Chairman, both of
the factors you mentioned as well as the third that I noted.
Chairman RAMSTAD. Again, in summary fashion, I would ask is
it a reasonable restatement of present law that the IRS cannot
tell States about cases in which their inmates are caught
committing taxpayer fraud because of taxpayer confidentiality
laws?
Mr. GEORGE. That is my understanding, Mr. Chairman.
Chairman RAMSTAD. There is an absolute prohibition?
Mr. GEORGE. There is an exception: If the underlying crime
that the IRS would like to communicate to the State relates to
tax crimes of some sort, in that instance it is my
understanding that communications are permitted. Otherwise,
there is a very strict--6103 is something that within the
Treasury Inspector General for Tax Administration we are very
concerned about. There are just strong prohibitions about
communicating certain information.
Chairman RAMSTAD. Would you recommend to the Congress, to
the Subcommittee, changing that statute?
Mr. GEORGE. I would in this circumstance, yes.
Chairman RAMSTAD. I would like to ask the same questions of
Ms. Jardini.
Ms. JARDINI. I would defer to the Treasury Department in
terms of making legislative requests of this Committee, sir.
However, I would point out that----
Chairman RAMSTAD. You view present law as an absolute
prohibition, absolute ban on information sharing with State
prison officials when discovering tax fraud.
Ms. JARDINI. Under these circumstances, yes, there are
enumerated exceptions, one of which is, for example, if an
inmate is on parole for a tax offense or the underlying offense
is a tax offense, we are able to communicate about that because
of the underlying tax offense that exists. If we are in an
ongoing investigation, I can communicate, for example, with
Investigator Bentley, an investigator from IRS, only to the
extent that I get the information that I need. I cannot tell
him anything about my case. So, yes, there is an absolute ban,
and the exceptions do not cover it.
Chairman RAMSTAD. Well, Mr. George, if you or one of your
colleagues at Treasury could provide recommendations to the
Subcommittee as to changes in the statute, that would be
greatly appreciated.
Mr. GEORGE. Will do. Thank you.
[The information was not received at the time of printing.]
Chairman RAMSTAD. To address this problem, we obviously
need to look at that. Let me just finally ask you a question,
Mr. Moriarty. You state in your testimony that in the mid-
eighties you identified over 400 inmates within the Texas
system filing fraudulent tax returns. What happened when you
took this evidence to the IRS?
Mr. MORIARTY. Initially, we did not get a response for
quite a while. We ended up--I guess they indicted 30 Federally;
30 inmates were prosecuted behind that. We also utilized the
Postal Inspection Service to deal with some of those issues.
Chairman RAMSTAD. So, 30 of 400 alleged cases, alleged
incidents were prosecuted?
Mr. MORIARTY. Yes, sir.
Chairman RAMSTAD. Let me ask you finally--and I mean
finally this time--Mr. Bentley, what has been your experience?
I know from your testimony that your investigation record is
very impressive also. You uncovered a number of cases of inmate
fraud, tax fraud. What was your experience with your fraud
cases when you turned them over to IRS field offices?
Mr. BENTLEY. Well, I originally got onto the scheme in
2000. I got no response from the IRS in 2000. I did talk to a
nice lady at the Fraud Detection Center in Atlanta, and when I
confiscated the check, I would void the check and mail it back
to her. She was very grateful, and I did the same thing in
2001. Whenever I get a check, I void the check and send it back
to them. Finally, in 2002--and it just so happened that in 2002
the scheme really blossomed. That is when the word started
getting out, and like I said, it started feeding on itself.
That is also when somebody built a fire under the IRS, and we
got them involved in it. It has worked out very well since
then.
Chairman RAMSTAD. So, the IRS has been responsive since
then?
Mr. BENTLEY. Yes, sir. We do not have enough IRS
investigators. Usually no more than maybe two, three are
available to work the prison cases. One in particular, Russell
Shandra that I have been working with since 2002, has been very
vigilant. He works with me very well. He always returns my
calls. I have turned over just reams of information to him, but
I only know of six prosecutions, six successful prosecutions
from 2002 to the present out of I don't know how many hundreds
of cases. Like I say, I know it is not--they may not think it
is good resources to prosecute inmates, but out of several
hundred cases, I know that there are people on the outside that
could be prosecuted. Of the six prosecutions, five of them were
inmates.
Chairman RAMSTAD. Mr. Bentley, are you referring to last
year when I understand the IRS identified 287 cases of inmate
tax fraud in your State? You are referring to last year, to
calendar year 2004?
Mr. BENTLEY. Yes, sir. I am not sure because I found two
different figures. One says something close to 800. One says
260-something, 270-something.
Chairman RAMSTAD. Our figures show 287 cases of inmate tax
fraud in South Carolina last year identified by the IRS.
Mr. BENTLEY. Okay, and that is the point that I do not
understand, whether if that is the cases that they identified
through catching them through computer flags and what-not, or
if that is cases overall, counting the ones that we found the
old-fashioned way, by searches and what-not. Apparently that is
the ones they caught, not counting the ones that we picked up
through----
Chairman RAMSTAD. Well, I think it is clear to all Members
of the panel that we need to make some changes. Certainly this
is a widespread problem and deserves more attention. The
taxpayers of America are just not going to stand for this kind
of inmate fraud. So, I am looking forward to your continuing
input, working together in a collaborative way, and I want to
thank all four Members of this panel. You have been very, very
helpful and have enlightened the Subcommittee. I want to thank
all three panels for the testimony here today. I also want to
thank the audience, the press, and staff for being so
cooperative in terms of honoring the anonymity of Inmate Doe.
Finally, I want to thank our outstanding Subcommittee staff who
worked very hard to put this Subcommittee hearing together. I
want to thank David Kass, chief counsel of the Subcommittee;
Payson Peabody; Pete Davila; and Scott Berman. Thank you all
for your hard work. If there is no further business before the
Subcommittee, this hearing is adjourned.
[Whereupon, at 4:11 p.m., the hearing was adjourned.]
[Questions submitted from Chairman Ramstad to Nancy J. Jardini and
her responses follow:]
Question: What can be done to improve the quality and timeliness of
prisoner information provided to the IRS by states and the Federal
Bureau of Prisons?
Answer: Requested data elements and format are included with the
information request provided to the states, District of Columbia and
the Federal Bureau of Prisons (BOP) each year. IRS will continue to
work with these parties to improve the timeliness and accuracy of this
information to allow IRS to develop programs to utilize the data during
the process of returns.Question: Is the IRS doing anything to improve
its success rate in stopping refund checks when it determines that
fraud has taken place?
Question: Is the IRS doing anything to improve its success rate in
stopping refund checks when it determines that fraud has taken place?
Answer: Yes, the analytical data mining process analyzes over 100
million refund returns each year and is constantly being improved and
enhanced. We continue to diligently examine the characteristics of
known false prisoner returns to maximize the effectiveness of our data
mining system and to fully utilize the specialized expertise of Fraud
Detection Center (FDC) analysts. These efforts have contributed to a
steady increase in the IRS's success rate in stopping fraudulent
refunds.
Beginning in processing year 2006, refunds for returns meeting
certain questionable criteria will be delayed for an additional week.
This will allow extra time to identify and stop fraudulent refunds from
being issued.
A computer programming change will be instituted for filing season
2006 that will limit the number of refunds that can be directly
deposited into the same bank account.
A computer programming change to flip all prisoner direct deposit
refunds to paper checks is being implemented for 2006. This will
provide additional time to verify the validity of the refund return.
Question: The testimony of inmate John Doe raises some serious
questions about the responsiveness of the IRS to information provided
to state prisons. Is the IRS trying to develop comprehensive procedures
to make sure that its field personnel work closely with correctional
officials to receive information about fraud cases uncovered by prison
officials?
Answer: Yes, the IRS currently conducts training sessions with all
field coordinators and management to discuss expectations of the fraud
program, how schemes are being perpetrated and to share best practices
for coordinating fraud prevention efforts with correctional facilities.
Field offices are increasing their coordination efforts with
correctional institutions, especially those with emerging or existing
refund fraud issues. This coordination will include routine liaison
contacts to discuss indications of fraud schemes, possible prevention
techniques, and to obtain information pertaining to criminal
investigations involving prisoners.
FDC's will have procedures in place to coordinate fraud prevention
efforts with the prisons in the states that the FDCs service. This will
include the establishment of procedures for the FDCs to review IRS
correspondence sent by prisoners.
Question: For years, it was Federal law that prisoners should not
receive SSI disability benefits while behind bars, for obvious reasons.
Yet Federal law left it to the inmate to report their change of address
to the jail so their benefits would be cut off. Not surprisingly, few
did. There is now a procedure in place between the Social Security
Administration and prisons to encourage prisons to provide up-to-date
information to SSA about prison inmates, so that their SSI benefits can
be cut off. Under this program, prisons receive a portion of any money
that is saved by cutting off an inmate's benefits. Could something
similar be considered to encourage prisons to provide information to
the IRS to help it catch tax fraud?
Answer: The possibility could be explored. The above addresses
benefits that an individual is entitled to receive unless they reside
in a jail, prison or certain other public institution. These benefits
are disrupted until after their incarceration. This would result in a
savings of benefits being distributed if the prisons notify SSA about
the inmate's incarceration.
Refund fraud is theft of Treasury funds. The inmate is not entitled
to any portion of the fraudulent claimed refund.
The incentive for prisons would be to restrict these illegal gained
funds from coming into the prison which are then utilized by prisoners
to engage in illegal activities within the prison for example purchase
of drugs.
Question: How many cases of prisoner refund fraud were referred by
the IRS to the U.S. Justice Department for prosecution each year
between 2000 and 2005?
Answer: QRP Subject Criminal Investigations Recommended for
Prosecution--FY2000, 95; FY2001, 113; FY2002, 144; FY2003, 223; FY2004,
232; FY2005*; 147
---------------------------------------------------------------------------
* As of 5/31/05
---------------------------------------------------------------------------
Please note that the above figures are QRP. We do not keep
statistics on prisoner prosecution recommendations.
Question: Does the IRS maintain a database of prison addresses?
Does the IRS have a policy against sending refund checks directly to
prisons?
Answer: Yes, the IRS maintains a database of prison addresses. The
IRS requests every possible address including P.O. Boxes and the
physical address for each of the institution's facilities. Generally
only one or two addresses are provided for each institution although
the current database can hold up to six addresses for each institution.
The IRS does not have a policy against sending refund checks
directly to prisons. Some prisoners have a legitimate need to file tax
returns, including filing a joint return with their spouse or filing a
return including income earned while not incarcerated for that
particular year.
[Submissions for the record follow:]
Statement of Cynthia Payne, Largo, Florida
Back in September, 2003 my husband made me aware of the tax fraud.
My husband was approached by an inmate by the name of Michael Shores.
Mr. Shores made this ``scam'' sound very pleasing. ``FREE MONEY FROM
THE IRS'', who wouldn't want it? However, my husband and I CHOSE to
turn the information over to the officials. We knew we couldn't go
directly to the prison with the information because too may of their
staff were involved. I contacted Gov. Bush's office and was told to
contact the IRS fraud hotline. When I contacted the hotline I was told
there was nothing they could do. So I went to the Hardee County States
Attorney's Office and spoke to Gary Ellis. After speaking with
Mr.Ellis, he contacted Sgt. Jimmy Harrison of the Hardee County
Sheriff's Office and set up a meeting for Sgt. Harrison and myself for
later that day. Mr. Ellis and Sgt. Harrison were both at awe with the
information they heard. I was continuously asked ``but, how?''. Sgt.
Harrison then put me in contact with William Miles of the FDLE. I spoke
to Mr. Miles and he agreed to go to Hardee C.I. and speak with my
husband. Mr. Miles and his partner, whom I know only as Lisa, went and
spoke to my husband. They agreed to try and get some fake bank accounts
set up so that the FDLE could intercept the money. The next think I
know, I was being contacted by an IRS Special Agent. Special Agent,
Tammy Tomlins. Special Agent Tomlins made an appointment with me to
meet at my home. On our first meeting I explained the issue to her. She
stated that she knew it was going on but never had an inside contact
until us (my husband and I). And now that she had an inside contact it
would give her the break she needed. I also explained to Special Agent
Tomlins as to what we expected out of us giving her the information. 1)
That a request for a sentence modification for my husband be put in and
2) A monetary reward for me. Special Agent Tomlins did explain that she
could not make any promises about anything until she new the
information was good, and that she would be able to get indictments on
those involved. Special Agent Tomlins made several trips to my home
over the next few weeks. She did telephone recordings of conversations
I had with Michael Shores' girlfriend and outside contact, Tammy
Hutchinson. At one point Tammy Hutchinson became so afraid that she was
being watched by the Special Agents that she left her home in the
Orlando area and went to Hollywood, Florida. While she was gone she
called and asked me if I would please go to her home in Orlando and
check her mail, in fear that the Special Agent's would try and
intercept her mail. I called Special Agent Tomlins and asked her if it
was ok for me to do this and she said she could not give me permission
to get anyone's mail. However if Tammy Hutchinson gave me permission to
get her mail then by all means I was allowed to. And so I did. Once I
retrieved Tammy Hutchinson's mail I called her and she asked me to open
2 letters and read them to her. One was from a man giving her names and
social security numbers to use for tax refunds, the other was from a
man wanting to know where his refund money was. I made copies of these
letters and turned them over to Special Agent Tomlins. Then I sent the
originals back to Tammy Hutchinson once she was back home. In December
2003 Special Agent Tomlins wrote a letter to Michael Marr, the
prosecuting attorney in Pinellas County, for my husbands case
requesting a sentence reduction. Michael Marr refused the request for
sentence reduction. Special Agent Tomlins then sent me the paper work
to fill out for a monetary reward. She asked that I sign and date these
blank forms and send them back to her. I did so. A few weeks later I
received the same papers from a Tennessee Office requesting that I
complete the paper work and send it back to them. I called Special
Agent Tomlins and she ordered me to send them back to her. At this
point I became very suspicious as to what was going on. I filled out
the papers and sent them back to Tennessee as told by the Tennessee
Office. I have sent the same paper work to Tennessee 3 times and they
have still not been received. I was also informed by B. Manuel at the
Tennessee Office that the requested reward from Special Agent Tomlins
was for a percentage of what she actually recovered from me, not from
my information. Our information led to the IRS intercepting $53 million
dollars in tax fraud money as well as indictments. Therefor as I see
it, I am due a monetary reward of $7,950,000. That would be 15% of what
the IRS recovered from our information. I have also expressed my fear
with this whole situation. My name and my husband's name are being made
public whether we wanted them to or not! This whole thing has caused
severe concern about our safety. The monitary reward would be used to
relocate my family for our safety. I have spoken with several
Congressmen's Office's and my husband has sent letters to them as well.
With our testimonies are we going to be safe? We don't know and noone
is able to assure us of our safety. I go to bed every night praying for
my families safety. This is a very big issue. Alot of people have had
their financial lives messed up because of our information to the IRS
Special Agent. But that is obviously obvious with the IRS intercepting
$53 million dollars in fraudulent tax monies. We just want we feel we
deserve for our part in this investigation. We have both agreed to
testify if necessary.
Statement of Kenneth Ryesky, Esq., East Northport, New York
I. INTRODUCTION:
Per Hearing Advisory OV-3 (22 June 2005), the Subcommittee on
Oversight, in conjunction with its Hearing that was held on 29 June
2005, has solicited additional written comments from the public in
connection with its examination of tax fraud committed by prison
inmates. This Commentary is accordingly submitted.
II. COMMENTATOR'S BACKGROUND & CONTACT INFORMATION:
Background: The Commentator, Kenneth H. Ryesky, Esq., is a member
of the Bars of New York, New Jersey and Pennsylvania, and is an Adjunct
Assistant Professor, Department of Accounting and Information Systems,
Queens College of the City University of New York. Prior to entering
into the private practice of law, Mr. Ryesky served as an Attorney with
the Internal Revenue Service (``IRS''), Manhattan District. In addition
to his law degree, Mr. Ryesky holds BBA and MBA degrees in Management.
He has authored several scholarly articles on taxation.
Disclaimer: This Commentary reflects the Commentator's personal
views, is not written or submitted on behalf of any other person or
entity, and does not necessarily represent the official position of any
person, entity, organization or institution with which the Commentator
is or has been associated, employed or retained.
III. COMMENTS ON THE ISSUES:
A. THE AMERICAN SYSTEM OF VOLUNTARY TAX COMPLIANCE:
The American taxation system is based upon voluntary tax
compliance, which means ``that taxpayers are expected to comply with
the law without being compelled to do so by action of a federal agent;
it does not mean that the taxpayer is free to decide whether or not to
comply with the law.'' IRS, Pub. 1273, Guide to the Internal Revenue
Service for Congressional Staff at 4 (January 1996) (SuDoc No. T22.44/
2: 1273/996). The voluntary compliance system is based upon self-
assessment in the initial filing of the return and calculation of the
tax, and the payment of the proper amount of the tax. For all of its
displeasures, the American system of voluntary compliance has long
proven to be a far, far preferable alternative to the more coercive
taxation systems employed in other societies of now and yore. Nothing
less than American freedom is at stake when Congress legislates its
policies for tax administration.
Certain conditions must be met in order for the American voluntary
compliance system to continue to work. For one thing, it is necessary
that individual members of the public perceive and believe that others
are also complying with the laws.
Moreover, it has long been recognized that the taxpayers need
definitive and meaningful assurances that information they voluntarily
disclose on their filed tax returns will be safeguarded in confidence
by the taxation authority; else they will harbor justifiable misgivings
about the practical wisdom of frankly and forthrightly complying with
the tax laws, to the detriment of the public weal and fisc. Boske v
Comingore, 177 U.S. 459, 469--470 (1900); United States v. Tucker, 316
F. Supp. 822, 825 (Dist. Conn. 1970); FSLIC v. Krueger, 55 F.R.D. 512,
514 (N.D. Ill. 1972); Webb v. Standard Oil Co. of Califormia., 49 Cal.
2d 509, 513, 319 P.2d 621, 624 (1957); New York State Dept. of Taxation
& Finance v. New York State Dept. of Law, 44 N.Y.2d 575, 378 N.E.2d
110, 406 N.Y.S.2d 747 (N.Y. 1978).
The confidentiality privilege, however, is not absolute. There are
situations where the public good is best served by the selective,
measured and controlled disclosure of various items of information
reported on tax returns. Exceptions to the general policy against
disclosure of tax returns and tax return information must be made very
cautiously, upon good cause clearly articulated, with due regard of the
need to balance the often conflicting public policies involved, and in
a manner which protects, to the greatest extent practicable under the
circumstances, the taxpaying public's expectations of confidentiality.
Moreover, the public must know that such a meaningful deliberative
process necessarily accompanies, and is a prerequisite for, those
instances when tax return information is so disclosed. Any disclosures
so made must inspire and facilitate public confidence in the tax
administration process.
In balancing the strong public policy of tax return confidentiality
against what often is an equally strong imperative to promote law
enforcement, sound governmental function and/or societal order, a
disclosure mechanism has been established by Congress in I.R.C. 6103.
The provision necessarily is one of the more complex and verbose
sections of the Internal Revenue Code, and has commensurately spawned a
large, complex and robust body of rules, regulations and case law.
I.R.C. 6103 is a key provision in facilitating tax administration,
and while revisions and updates to the statute are periodically
warranted, any tinkering with the statute or its implementing
regulations must be done with great care in order to maintain the
delicate balance between taxpayer confidentiality and need for
disclosure.
B. THE PROBLEMS IN THE PRISONS:
As amply recounted in further detail by the various witnesses at
the Subcommittee's 29 June 2005 hearing, the tax fraud practiced by
prison inmates is a growing problem that has collective effects well
beyond the plundering of the United States Treasury. The often
significant sums of ill-gotten money placed at the disposal of prison
inmates and others fuel the engines of contraband, chaos and
corruption, thereby threatening order within the prison walls, and
endangering the health, safety and lives of inmates and law-abiding
citizens alike.
Moreover, the public morale also suffers when the citizenry sees
the inability of their officials and civil servants to deal with the
problem, as the dollars flow into the pockets of dishonest criminals
who hold the law in contempt. Neither law enforcement nor tax
administration can benefit from such public perceptions.
That which nominally is a tax administration issue has thus
expanded well beyond the purview of managing the public fisc, becoming
a general law enforcement problem that tax administration alone cannot
adequately address without the aid and cooperation of other competent
law enforcement professionals. As Messrs. Davis, Keller and Feeney
indicated in their respective testimony at the hearing, the law
enforcement officials in their State of Florida (which has no state
personal income tax) seek closer cooperation with the IRS in addressing
the problem. Mr. Moriarity from the Texas Department of Criminal
Justice has expressed similar sentiment (Texas likewise has no state
personal income tax). The problem clearly cannot be successfully
addressed as merely one of tax administration.
C. APPROACHES TO ADDRESSING THE PROBLEM:
There is no single simple solution to the prison inmate tax fraud
problem. In addition to the legislative approaches, which clearly are
necessary, there also need to be administrative efforts on the part of
the cognizant Federal and state agencies.
Every bureaucracy has its own culture. Given the aforediscussed
need for confidentiality of tax returns, the IRS has developed an
internal culture in which secrecy plays a significant role. Though this
culture of secrecy generally serves the IRS quite well, it has been
known to have dysfunctional aspects when one organizational element
within the IRS must cooperate with another. See, e.g., Berg v.
Commissioner, T.C. Memo 1993-77. Therefore, IRS cooperation with other
agencies, as is clearly needed with respect to the instant problem, can
only come about through the strong guidance and direction from the
upper echelons of the IRS and the Treasury (though the respective
testimonies of Ms. Jardini and Mr. George indicate that such guidance
and direction would likely be forthcoming from the IRS and Treasury
leadership if the appropriate statutory framework were in place).
Administrative matters aside, there are several approaches and
issues that the Congress ought to explore. These include, but are not
necessarily limited to, the following:
1. Amendments to I.R.C. 6103: Ms. Jardini and Mr. Moriarity each
indicated that the current statutory limitations on the IRS's
disclosure of information have impeded cooperation between the IRS and
the prison and law enforcement bureaucracies. I.R.C. 6103(d) is
couched in terms of limitation to tax enforcement and administration,
and provides precious little leeway for disclosure in matters of more
general law enforcement. The traditional and typical application of
I.R.C. 6103(d) would be to provide Federal Income Tax information to
the states so that they can enforce their own personal income taxes.
This would hardly apply to states such as Florida or Texas, which, as
previously mentioned, have no personal income tax to enforce.
Accordingly, the statutory provision that enables Federal-State
coordination of analogous tax administration is often useless for
coordinating efforts to control prisoner tax fraud.
Expanding the scope of I.R.C. 6103 to encompass investigation and
prosecution of tax fraud by incarcerated prisoners and their
confederates is a sine qua non to addressing the problem. As emphasized
by Mr. Moriarity, the statutes need to permit not only disclosure of
information, but also ongoing feedback, so as to facilitate ``a team
approach of IRS and criminal investigators who are familiar with
working informants in a correctional setting.''
Indeed, in a non-taxation context, Congress enacted analogous
legislation in 1992 when it amended the Child Abuse Prevention and
Treatment Act to remove restrictions upon information sharing between
and among cognizant state and Federal agencies, see Congressional
Findings, P.L. 102-586, 9(a), 106 Stat. 5036 (4 November 1992).
[N.B. This Commentator has already written on the problems and
confusion caused whenever Congress redesignates paragraphs and
subparagraphs of the Internal Revenue Code, Kenneth H. Ryesky, Tax
Simplification: So Necessary and So Elusive, 2 Pierce L. Rev. 93, 100--
101 (2004), and beseeches the Congress to avoid the renumbering of
existing paragraphs and subparagraphs at such time as it amends I.R.C.
6103 (or any other statutory section).].
2. Enhanced penalties for tax fraud by or in connection with
incarcerated prisoners: Certain classes of illegal activities are
already subject to enhanced penalties.
7 U.S.C. 111 (b) provides an enhanced penalty for using a deadly
weapon in assaulting, resisting, or impeding certain Federal officers
or employees. 15 U.S.C. 6823 prescribes an enhanced penalty for
fraudulently accessing customer information of financial institutions
when the harm exceeds a certain dollar threshold. Under 31 U.S.C.
5324, an enhanced penalty is warranted for illegally structured money
transactions when the amount involved exceeds certain dollar
thresholds.
Moreover, Congress has previously made findings that certain
species of criminal activity are especially detrimental to the public
welfare and interest. These include, for example, harassment,
intimidation and violence committed against foreign officials, P. L.
92-539, 2, 86 Stat. 1070 (24 October 1972).
Given the disproportionately broad sweep of the harm inflicted on
account of tax fraud by incarcerated prisoners and their confederates,
there is ample precedent for the Congress to make specific findings
that prisoner tax fraud is an especially nefarious offense for which
enhanced penalties are appropriate. Such penalty enhancements can be
prescribed by statute, and/or provided for in the United States
Sentencing Guidelines [this Commentary will not expound upon the issues
induced by the United States Supreme Court decision in Booker v. United
States, ------ U.S. ------, 125 S. Ct. 738; 160 L. Ed. 2d 621 (2005)
regarding the Sentencing Guidelines.].
The sweep of the enhanced penalties should encompass not only the
prison inmates, but also others who cash checks or otherwise
participate in the schemes of the inmates to defraud the Treasury. Many
prison tax fraud schemes involve outside confederates, see, e.g. United
States v. Hicks, 1999 U.S. App. LEXIS 32146 (10th Cir. 1999). Moreover,
prison corrections officers and other prison employees are often
complicit in diverse illegal schemes of prisoners, including the
smuggling of contraband, see, e.g. United States v. Torok, 2000 U.S.
Dist. LEXIS 11054 (E.D.Pa. 2000), Martinez v. Cardwell, 542 P.2d 1133
(Ariz.App. 1975); State v. Guerra, 151 Conn. 159, 195 A.2d 50; (Conn.
1963); Commonwealth v. Booth, 291 Pa Super 278, 435 A.2d 1220 (1981);
People v. Strickland, 342 Ill. App. 3d 566; 795 N.E.2d 793 (2003),
appeal denied 206 Ill. 2d 641; 806 N.E.2d 1071 (2003); see also Dept.
of Corrections v. Drayton, New York City Office of Admin. Trials &
Hrgs. Index No. OATH 1901/99 (28 December 1999) (reciting testimony
that civilian employees constitute approximately 40% of the arrests for
drug smuggling in NYC prisons.).
3. Diminished right of tax return confidentiality: As discussed
above, the confidentiality of tax returns and the information contained
therein is a vital component of the American system of voluntary tax
compliance. Nevertheless, certain individuals under certain
circumstances may have a diminished right to and expectation of
confidentiality with respect to their tax returns.
Those who in bad faith abuse the legal system can lose the full
enjoyment of their legal rights. For example, criminal defendants who
willfully misbehave at their trials and/or fail to appear may waive
their right to trial, see, e.g. Taylor v. United States, 414 U.S. 17
(1973); People v. Aiken, 45 N.Y.2d 394, 397, 380 N.E.2d 272, 274, 408
N.Y.S.2d 444 (1978). Those who abuse the legal system with repeated and
vexatious litigation may have limits placed upon their access to the
courts, see, e.g., Demos v. Storrie, 507 U.S. 290 (1993); In re
Sassower, 20 F.3d 42 (2d Cir. 1994); Feathers v. Chevron, USA, Inc.,
141 F.3d 264 (6th Cir. 1998); Duffy v. Holt-Harris, 260 A.D.2d 595, 687
N.Y.S.2d 265 (2d Dept. 1999), appeal dismissed 93 N.Y.2d 1033, 719
N.E.2d 915, 697 N.Y.S.2d 555; 1999 (1999). This includes prison inmates
who have engaged in vexatious litigation in the courts, Richard v.
Cuyahoga County Bd. of Commissioners, 654 N.E.2d 443 (Ohio App. 1995),
appeal dismissed, 89 Ohio St. 3d 205, 2000 Ohio 135, 729 N.E.2d 755
(2000).
Moreover, incarcerated inmates who have abused the system have been
properly curtailed in their access to prison law libraries, Wilkie v.
State, 644 P.2d 508 (Nev. 1982).
The American system is based upon self-assessment in the initial
and timely filing of the tax return by the honest taxpayer. Estate of
Ashman v. Commissioner, 231 F.3d 541, 544 (9th Cir. 2000); Cowarde v.
Commissioner, T.C. Memo 1976-246. There is no reason why individuals
who, in bad faith, abuse and flout the system must be given its full
benefits of confidentiality to the detriment of law enforcement and
public order interests. This is especially so in the cases of
incarcerated inmates.
IV. CONCLUSION:
As made plain by the testimony at the Subcommittee's 29 June 2005
hearing, the problem of prisoners defrauding the tax system is serious
and growing. Reining in the problem will take the joint and concerted
efforts of the IRS and other Federal and State law enforcement
agencies, who must be given the statutory authority to meaningfully
cooperate, interact and share relevant information and feedback.
Any intrusions by the prison authorities into the affairs of
inmates must be engineered and calculated to facilitate good faith
compliance with the tax laws, and not to impede such compliance, cf.
Curry v. Commissioner, 571 F.2d 1306 (4th Cir. 1978).
In making adjustments to I.R.C. 6103 to facilitate the sharing of
information, appropriate regard must be given to the privacy rights of
prison inmates who, notwithstanding their status as such, do in fact
make good faith efforts to comply with the tax laws.
The IRS and the various state and Federal law enforcement
authorities all desire to cooperate with one another to address the
problem of tax fraud by prison inmates, but are currently hobbled by
the restrictive statutory provisions now in force. They, along with the
law-abiding citizenry of America, await Congressional action, so that
the statutes that currently impede law enforcement can facilitate sound
enforcement practices.
Regardless of any administrative measures that need to be taken by
the IRS and the other relevant agencies, prompt action by Congress is
necessary before any meaningful strategies to address the matter can be
implemented.