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.