Prisoners Filing False Tax Returns

Published Categorized as Tax Procedure, Tax Returns
Prisoners Filing False Tax Returns, Houston Tax Attorney

If you are reading this, you probably have a job or business or are an employee and put in long hours at work. This may mean time away from your friends and family and not being able to pursue things that give you purpose.

We make these sacrifices to earn a living. To provide for our own basic needs. The pressure is real as Social Security isn’t reliable, our government often lets us down, and there are more people out to take advantage of us than there are out there to help us.

That leads to the question of whether one can avoid this whole system by simply filing a few pieces of paper with the IRS and then cashing the check that the IRS sends to us in response. The answer lies in a defect in how the IRS is set up and how it processes tax returns.

The IRS will generally issue refund checks with very minimal verifications. It does this in bulk and it often does it without having a human even reviewing what is happening. The check that prevents this is the consequences of 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, as they are already incarcerated. They have no disincentive to file false refund claims and collect refund checks from the IRS. This 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.

Most would likely disagree with this. Filing a refund claim on a simple 1040 is as routine as it gets. It is garden variety fraud.

The IRS’s Ability to Detect Fraudulent Returns

In cases like these, the prisoner’s behavior is undoubtedly an issue. However, the crux of the problem lies in the system itself and the IRS’s failure to effectively identify such fraud. The ease with which this crime can be committed could lead some to argue that the system essentially functions as entrapment—tempting individuals with the prospect of ‘free money,’ only to impose criminal penalties when they submit the necessary paperwork to claim it.

The crux of the issue for the IRS lies in its inability to effectively detect such fraudulent activities. As Wardell argued, he did not employ intricate methods to obtain refund checks from the IRS. Instead, he relied on the possibility that amidst the millions (or even billions) of tax forms processed by the IRS annually, his false returns would go unnoticed.

Although the court opinion does not detail whether the IRS issued tax refunds to Wardell or how he may have cashed those checks, it’s probable that for every detected case of a prisoner receiving a false tax refund, there are several undetected instances involving other prisoners.

The Takeaway

The IRS frequently engages in aggressive disputes with small business taxpayers over minor tax deductions or research tax credits, often employing dubious tactics and processes to pressure taxpayers into settling for less, even when they are entirely justified. Simultaneously, the IRS seemingly disregards countless fraudulent tax refunds. As a result, the average taxpayer, primarily small business owners who contribute significantly to government funding, bears the financial burden.

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