Prisoners Still Filing False Tax Returns: Yet Another Problem Facing the IRS

Criminals incarcerated in prison often file false tax returns with the hope of obtaining tax refunds. In many cases the IRS does in fact issue erroneous tax refunds in this type of scheme (I remember hearing once that the IRS pays out a couple of million dollars in false tax refunds due to these tax schemes each year). The recent case of US v. Wardell shows how this type of tax scheme usually plays out.

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 Colorado 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 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. 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.

This type of tax scheme is very problematic for the IRS. Essentially these prisoners are betting that the IRS will overlook their false submissions 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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