A multimillion dollar scheme involving prison inmates and fraudulent federal tax returns is creating major headaches for Oklahoma child support enforcement officials and their counterparts nationwide.
“It's a huge problem,” said Jeff Wagner, spokesman for the Child Support Services division of the Oklahoma Department of Human Services.
Oklahoma, like other states, participates in a tax refund intercept program in which the IRS seizes tax refund checks destined for individuals who owe back child support.
The IRS sends the intercepted money to state child support enforcement officials. State officials then redirect the payments to the individuals who are owed the back child support. States are asked to distribute the money quickly.
So far, state employees have identified more than $4 million in intercepted tax refund checks that they suspect contain proceeds from fraudulent federal tax returns, Wagner said.
Internal Revenue Service officials confirmed last month that 438 of those intercepted refund payments totaling $1,828,084 were, indeed, fraudulent, Wagner said. The remainder are still being investigated by either the IRS or state Child Support Services officials.
The payments — which create a financial risk to the state — are linked to a nationwide fraud scheme that has spread among prison inmates, Wagner said.
Nationwide, the IRS identified more than 170,000 fraudulent tax returns from inmates and halted refund checks totaling $2.1 billion during the first nine months for federal fiscal year 2012, according to a heavily redacted report released last December by the Treasury Inspector General for Tax Administration.
About $2.7 billion in fraudulent refund checks to prisoners were halted by the IRS the prior federal fiscal year, the inspector general reported.
Information about how many of the fraudulent tax returns were filed by Oklahoma inmates was unavailable.
“I know that it has happened a time or two, but I don't know how extensive it is,” said Jerry Massie, spokesman for the Oklahoma Corrections Department.
There's also no way to know how many fraudulent claims made by inmates are slipping through IRS fraud detection filters.
Many are, however, and they are creating costly problems for child support enforcement officials in Oklahoma and elsewhere.
In Oklahoma, the tax intercept program is responsible for helping collect about $50 million of the $350 million in annual child support payments distributed through the state's Child Support Services division of the Department of Human Services, Wagner said.
Wagner says the program is an important tool in the state's child support collection efforts.
However, he contends the program is unfair to states in one respect.
Sometimes the IRS fails to detect that fraud has occurred until after intercepted funds have been forwarded to states and distributed. When that happens, the IRS forces states to “repay” those funds by withholding a portion of the money from future intercepted payments.
The state is still responsible for distributing the full amount of intercepted payments, so state taxpayers end up paying for any IRS oversight failures.
Oklahoma child support enforcement officials can try to get that money back from the families that received the child support money, but often that money has already been spent and it creates a hardship for those families, Wagner said.
“Some states have been hit real hard,” Wagner said.
To protect Oklahoma taxpayers and child support clients, Wagner said his agency has been developing its own methods of detecting fraudulent tax refunds to try to identify fraud before funds are distributed.
It is this system that has identified about $4 million in inmate tax refund claims that officials believe are fraudulent.
The fraudulent refund claims tend to have several things in common, Wagner said.
“They tend to be just under $10,000,” he said, adding that inmates filing the claims apparently believe their refund claims are less likely to draw IRS scrutiny if they keep them under that amount.
Suspicions also are raised when several refund checks list the same address or post office box. Sometimes when investigators go to an address listed on multiple refund claims they find a vacant house or lot with a mailbox, he said.
Sometimes prisoners file fraudulent claims for themselves and sometimes they file multiple claims using the identities and social security numbers of other inmates, he said.
Families receiving intercepted payments don't appear to be complicit in the scams, Wagner said.
Wagner said he didn't want to provide details about methods the state is using to detect fraud because he didn't want to give criminals ideas about how to hide their misdeeds.
Federal tax officials are similarly secretive about fraud detection methods.
The inspector general's report contained numerous redactions that appeared to be designed to withhold fraud detection methods.
The report does say the IRS collects information about prisoners and their incarceration and discharge dates from state and federal prison officials and uses that information to create a “Prison File.”
That file is used to identify tax returns filed by inmates and those returns are given extra scrutiny.
The system has its flaws.
“Some prisoner information contained in the file is inaccurate, the file contains incomplete records, and not all facilities that house prisoners reported prisoners,” the inspector general reported.
“Further, the IRS does not have the authority to disclose to the prisons information related to prisoner-filed fraudulent tax returns or prisoner identity issues,” the inspector general said. “This limits the ability of prison officials to curtail prisoners' continued abuse of the system.”
The inspector general said there have been times in the past when the IRS had authority to share such information and recommended that the agency seek renewal of the authority from the U.S. Congress.
“Refund fraud committed by prisoners remains a significant problem for tax administration,” the report said.