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.