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24–905 2006

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 

( 

ii 

COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

BOB BEAUPREZ, Colorado 

MELISSA A. HART, Pennsylvania 

CHRIS CHOCOLA, Indiana 

DEVIN NUNES, California 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

Allison H. Giles, Chief of Staff 

Janice Mays, Minority Chief Counsel 

SUBCOMMITTEE ON OVERSIGHT 

JIM RAMSTAD, Minnesota, Chairman 

ERIC CANTOR, Virginia 

BOB BEAUPREZ, Colorado 

JOHN LINDER, Georgia 

E. CLAY SHAW, JR., Florida 

SAM JOHNSON, Texas 

DEVIN NUNES, California 

J.D. HAYWORTH, Arizona 

JOHN LEWIS, Georgia 

EARL POMEROY, North Dakota 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

CHARLES B. RANGEL, New York 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 

iii 

C O N T E N T S 

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 

(1) 

TO EXAMINE TAX FRAUD COMMITTED BY 

PRISON INMATES 

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:] 

2 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–7601 

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.’’ 

3 

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. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘109th Congress’’ from the menu entitled, 

‘‘Hearing Archives’’ (http://waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an email will be sent to the address which you supply confirming your 

interest in providing a submission for the record. You MUST REPLY to the email 

and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Wednesday, July 

13, 2005. Finally, please note that due to the change in House mail policy, the U.S. 

Capitol Police will refuse sealed-package deliveries to all House Office Buildings. 

For questions, or if you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

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The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

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 

4 

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 

5 

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. 

f 

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? 

6 

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. 

f 

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. 

7 

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 

8 

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. 

f 

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 

9 

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. 

f 

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 reVerDate Aug 31 2005 00:43 Jul 14, 2007 Jkt 024905 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HR\OC\24905.XXX 24905
10 

turns 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 

11 

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 

12 

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. 

f 

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 

13 

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. 

14 

[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. 

15 

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 

16 

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 

17 

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. 

18 

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. 

f 

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. 

19 

Chairman RAMSTAD. So, it is your testimony that you have been able to defraud the U.S. Government of $31⁄2 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 

20 

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? 

21 

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 

22 

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 

23 

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 faVerDate Aug 31 2005 00:43 Jul 14, 2007 Jkt 024905 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 E:\HR\OC\24905.XXX 24905
24 

miliar 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 

25 

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 

26 

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 

27 

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 reVerDate Aug 31 2005 00:43 Jul 14, 2007 Jkt 024905 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 E:\HR\OC\24905.XXX 24905
28 

turns, 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:] 


Insert 24905a.001
29 

Ms. JARDINI. Our first priority at the IRS in prisoner refund 

fraud is to identify the false claims quickly enough to stop the reVerDate Aug 31 2005 00:43 Jul 14, 2007 Jkt 024905 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\OC\24905.XXX 24905

Insert 24905a.002 Insert 24905a.003
30 

funds 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 

31 

1This number includes one scheme with two returns totaling $1.8 billion. 

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%. 

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 

32 

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. 

33 

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 reVerDate Aug 31 2005 00:43 Jul 14, 2007 Jkt 024905 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 E:\HR\OC\24905.XXX 24905
34 

turns 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 

35 

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. 

f 

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 prisVerDate Aug 31 2005 00:43 Jul 14, 2007 Jkt 024905 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 E:\HR\OC\24905.XXX 24905
36 

oners 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 

37 

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 

38 

filed and the refund amounts claimed by all individuals and by prisoners as of April 

1, 2005. 

Number of Returns 

Processing Year (PY) 2004 

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 

1The IRS cannot identify the total number of prisoner returns filed because the prisoner data file is only 

matched against refund retunrs. 2This 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 individVerDate Aug 31 2005 00:43 Jul 14, 2007 Jkt 024905 PO 00000 Frm 00042 Fmt 6633 Sfmt 6621 E:\HR\OC\24905.XXX 24905
39 

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. 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. 

uals to commit fraud, our analysis of 18,343 false refunds involving prisoners for 

the 2004 processing year: 3

• 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

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. 

40 

5These five reasons were given as explanations for 91% of the refunds issued to prisoners who 

submitted fraudulent returns. 11This 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. 

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

Reason Refund Not Stopped Total Refunds Not 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

Reason Refund Not Stopped Total Refunds Not 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

41 

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. 

Reason Refund Not Stopped Total Refunds Not Stopped 

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. 13Prior year returns were processed in the prior year but detected during the current processing year. 14This 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. 16Similar 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. 18This 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. 

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 

42 

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. 

f 

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. 

43 

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 inVerDate Aug 31 2005 00:43 Jul 14, 2007 Jkt 024905 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 E:\HR\OC\24905.XXX 24905
44 

vestigator. 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. 

45 

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. 

f 

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 

46 

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 emVerDate Aug 31 2005 00:43 Jul 14, 2007 Jkt 024905 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 E:\HR\OC\24905.XXX 24905
47 

ployed 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:] 

48 

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. 

49 

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 

50 

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. 

f 

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. 

51 

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 

52 

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 timeintensive 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. 

53 

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. 

54 

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 

55 

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? 

56 

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, nonidentifying 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 

57 

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 Presi- dent 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 inconVerDate Aug 31 2005 00:43 Jul 14, 2007 Jkt 024905 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 E:\HR\OC\24905.XXX 24905
58 

sistent 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. 

59 

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 

60 

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 

61 

* As of 5/31/05 

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 

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. SpeVerDate Aug 31 2005 00:43 Jul 14, 2007 Jkt 024905 PO 00000 Frm 00065 Fmt 6633 Sfmt 6621 E:\HR\OC\24905.XXX 24905
62 

cial 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. 

f 

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 

63 

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 

64 

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. 

65 

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, notVerDate Aug 31 2005 00:43 Jul 14, 2007 Jkt 024905 PO 00000 Frm 00069 Fmt 6633 Sfmt 6621 E:\HR\OC\24905.XXX 24905
66 

withstanding 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. 

Æ