There are serious consequences for filing false tax returns.  This can include civil and criminal penalties.  These penalties may not be all that effective of a deterrent for someone who is currently incarcerated, which is evidenced by cases like United States v. Wardell, 05-1492 (10th Cir. 2007).

Facts & Procedural History

Wardell is a prisoner incarcerated in a Colorado state prison. While in prison, Wardell prepared false tax returns and W-2 forms in an effort to obtain tax refunds for himself and other prisoners.

The court noted that even though Wardell was incarcerated, he:

was able to use numerous individuals and fictitious entities, addresses, and paperwork to create the illusion that he earned income and was entitled to multiple tax refunds. He filed a large number of false returns in the names of inmates without their knowledge, used false addresses outside of the Texas prison system, and intentionally mislabeled his mail as “legal mail” in order avoid detection. Wardell also sent false returns to multiple IRS service centers around the country, created and used false W-2 Forms and other paperwork to legitimize his ” claims. He conspired with other inmates to further the scheme.

Wardell was eventually caught.  He was indicted on twenty tax-fraud related offenses, four counts of making false statements in tax returns, and fifteen counts of aiding and assisting the presentation of false tax returns.

Routine Fraudulent Returns

Wardell was convicted on all but two counts. The district court, in applying the federal sentencing guidelines, enhanced the sentence because the offenses involved “sophisticated means.”  Wardell was sentenced to ninety-six months imprisonment for his tax crimes.

Wardell argued that “his scheme lacked shell corporations, offshore accounts, dummy boards of directors, blind paper trails, or multi-national transactions (in addition to the fact that his actions were patently detectable), his tax scheme was routine and conventional.” Thus, Wardell argued that his simple tax crimes did not involve “sophisticated means,” and if the court held that they did, that all tax crimes would require this type of sentencing enhancement.

The court disagreed, finding that Wardell’s:

fraudulent conduct was not a garden variety fraud. His was not simply a case of claiming to have paid withholding taxes not paid or of not disclosing income to one’s accountant.

The IRS’s Ability to Detect Fraudulent Returns

The prisoners conduct is a problem in cases like this.  But the root of the problem is the IRS’s inability to detect this type of fraud.  This is the real problem for the IRS.  

As Wardell argued, he did not employ sophisticated means to obtain refund checks from the IRS.  Instead, he was hoping that the IRS would not notice the false returns given the millions (if not billions) of tax forms that the IRS processes each year.

The court opinion does not specify whether the IRS issued tax refunds to Wardell or if (or how) Wardell cashed those checks, but for every false tax refund issued to a prisoner that is detected there are likely several prisoners who have received false tax refunds that have not been detected.

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