Tax Refund Fraud Committed by Prisoners Has IRS Baffled

Published Categorized as Tax Crimes, Tax Procedure
Courts Says No Criminal Fraud, Irs Imposes Civil Fraud Penalty, Houston Tax Attorney

Tax fraud is a crime that has always been a challenge for the IRS to detect and prosecute. It is even more complicated when prisoners get involved, as is the case with fraudulent tax refund schemes.

The United States v. Turturro, 06-12033 (11th Cir. 2007) case is an example of this type of fraud, where prisoners use bankrupt corporations’ information to file fraudulent tax refund claims for fellow inmates.

This fraudulent scheme has presented a compliance burden for the IRS, costing the government millions of dollars each year. And most cases never get detected and the criminals never even see the judge.

Facts & Procedural History

Turturro was in prison serving a sentence for manslaughter. While in prison, he learned of a tax refund scheme.

The scheme involved identifying information from bankrupt corporations and using this information to file tax refund claims for fellow inmates. He did this by including the bankrupt corporation’s information to file Forms W-2 for the inmates.

Turturro would mail the names and social security numbers to his wife. His wife would then prepare tax returns using the social security numbers, mail the returns to the IRS, and collect and cash the refund checks. Turturro instructed his wife where to send the refund money after it arrived.

When his wife quit, he enlisted another woman’s help. Ultimately the IRS detected the fraud, and he was indicted on 23 counts of mail fraud and filing false claims.

Background on Prisoner Tax Fraud

Incarcerated criminals have ample time to study the tax code and find vulnerabilities to exploit. A common technique is to file fraudulent refund claims using stolen taxpayer information.

Unlike free citizens, prisoners have minimal living expenses. Much of ill-gotten refunds can go straight to their benefit on the outside. Prisoners enlist friends and family to facilitate cashing refund checks and moving the money.

Authorities estimate these schemes have mushroomed into an epidemic costing upwards of $1 billion as of 2021 [articlel updated in 2021]. Yet few perpetrators are ever caught, much less prosecuted. Audits of prisoner returns remain minimal, enabling ongoing fraud.

Tax Fraud is Difficult to Detect

Tax crimes can be one of the more challenging crimes to detect and prosecute. The crimes are often sophisticated and targeted to weaknesses in the IRS’s detection systems. The Turturro case is an example.

The Turturro case involved information associated with bankrupt corporations. The bankruptcy court records contain quite a bit of this type of information. The same can be said of records for deceased taxpayers [using information culled from the local probate records], small corporations that were sold to third parties via asset sales and not as stock sales [culled from state corporate filing records], or even international corporations [possibly those that have ceased doing business in the U.S.].

This prisoner refund scheme exploits the IRS’s systemic weaknesses and this enables prisoners to evade detection:

  • Minimal audits of prisoner returns due to limited IRS resources.
  • Difficulty identifying “real” W-2s for inactive EINs from bankrupt firms.
  • No electronic matching of income docs against returns using inactive EINs.
  • Prisoners use intermediaries to cash refund checks remotely.
  • Sophisticated use of multiple prisoner identities and outside bank accounts.

Thus, the refund claims are filed in a way that does not put the IRS on notice of the fraud. The IRS is not able to tell whether one refund claim is different from another in this regard. And because the companies are bankrupt, presumably the businesses are not around to detect and alert the IRS that there is a problem.

This type of blatant tax fraud is expensive. It costs the government millions of dollars each year. The IRS’s efforts to stop it have not succeeded. This is evidenced by court cases like this one. This issue is no doubt at the top of the IRS’s compliance challenges. It will be interesting to see how the IRS’s response to this type of fraud changes over time.

The Takeaway

This case highlights the difficulties that the IRS faces when trying to detect and prosecute tax fraud, particularly in cases where prisoners are involved. The use of bankrupt corporations’ information to file fraudulent tax refund claims presents a significant compliance burden for the IRS, and despite their efforts, these schemes continue to cost the government millions of dollars each year. The IRS must continue to develop more effective ways to detect and prevent this type of fraud to protect taxpayers’ money and ensure the integrity of the tax system.

Prisoner tax fraud exploits systemic weaknesses and limited enforcement resources. Though the problem is not new, improved data analytics and increased audits of prisoner returns can help detect schemes earlier. The IRS must also coordinate with Federal Bureau of Prisons to identify and prosecute ringleaders who propagate these schemes behind bars. And stricter filters on issuing refunds associated with defunct EINs could trigger closer scrutiny.

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