By mid-March, most Americans are busy hiring accountants or sitting down with the past year's receipts to complete their tax forms. But in several states for the last few years, and yours could be one of them, inmates have also been busy too -- filing bogus returns and gaining thousands of dollars from the federal government in exchange.

In Georgia in 2003, three inmates and the wife of one offender schemed to scam the government out of $2.4 million after creating phony corporations and then filing tax returns as if they were employed by those organizations.  Federal investigators uncovered the plot before any checks were cut.

In Michigan the same year, state inmates were sentenced to time in federal prison after filing fake tax returns in the names of several other prisoners.

And, this year similar schemes have been uncovered in South Carolina and Florida.

"They have a lot of time on their hands and many of them are very crafty," said Charles Sheppard Inspector General for the South Carolina Department of Corrections. "I can promise you that if South Carolina is [experiencing] it other states are [too]. It's pretty significant; two years ago we had [scams] in the neighborhood of $200,000."

Sheppard, who helped uncover and investigate the current tax fraud scam going on within the DOC, said the inmates are always trying new ways to out-smart corrections and Internal Revenue Service officials.

Even though tax forms have now been deemed contraband in the S.C. prisons, inmates have still found way to file false returns, Sheppard said.

"Thy are very ingenious; they figure out how to do it. They talk with someone to get the information [they need]," he said.

Also, the forms are difficult to detect.

"It difficult for the officers who are out there to keep up with that. It's hard to shake down cells [all the time]. But what we do here is take our rapid response teams into the prisons every once in a while. That's when a lot of that [contraband] is found," he said.

Prior to the current situation, it was up to prisons officials in South Carolina to keep a watchful eye on inmate accounts to determine if any fraudulent activity was taking place. It was that monitoring the uncovered the current scam, which may end up totaling more than $2 million in false refunds.

S.C. Inmates Found Out

According to Charles Hunter, Special Agent in Charge of the Charlotte, N.C., IRS Field Office, two different groups of inmates have been indicted on charges related to filing false tax returns.

A total of eight people have been indicted involving two separate schemes, Hunter said.

In one scam, two S.C. DOC inmates at McCormick Correctional Institution and the mother of one of the offenders worked together to file false tax returns using the names and social security numbers of fellow inmates who were not a part of the scam.

One of the inmates, Luther Marcus, convinced his mother, Deborah Fortescue, to allow her checking account to be used as a receptacle for many of the tax refunds.

According to Hunter, in some cases, the inmates offered a "finder's fee" of $500 to fellow inmates in exchange for the use of their social security numbers. Then the pair would create false W-2 forms and prepare returns based on those identities.

Those returns were sent to the IRS and refund checks were specified for deposit in Fortescue's bank account. After the refunds were deposited, the inmates would collect the funds.

"The majority of information on the returns [was] totally bogus. Some inmates do earn $300 to $500 while incarcerated, but it wouldn't amount to the refunds they received," said Hunter.

Refund checks ranging from $3,739 to $5,508 were cut for those false returns by the IRS for the tax year 2001.

According to Hunter, DOC officials noticed that in the spring of 2002 large amounts of money were being deposited in inmate accounts. DOC officials provided the information they gleaned from their investigation to the IRS and the IRS traced the checks back.

"Through working with the DOC we were able to freeze the accounts," said Hunter. "Once the agents started investigating they found many more [inmates] involved. The whole case [in South Carolina] will involve $2 million in refunds [in the end]."

Sheppard said some of the money the inmates were receiving was equal to the amount they had made during the entire year.

"What we learned is they had claimed the earned income credit, which would make a significant difference in what they got back from the government." Sheppard said.

When private industries use inmate labor, they pay the inmate a wage and take out taxes and social security, Sheppard explained. This enables an inmate to file a legitimate tax return. But in this case, the returns were bogus.

In addition to those returns, the two inmates also completely fabricated returns for inmates with no work history.

"We did find some instances in which inmates who would get access to other social security numbers, particularly the more youthful ones, were claimed as dependants," said Sheppard.

The investigation also uncovered another scheme in which a second group of inmates had also been filing false tax returns that claimed refunds since 1999.

Sheppard added that the IRS typically processes returns under an assumption of honesty and then later audits those returns that don't match up with information provided by employers.

At the time of these incidents, inmates were allowed to file their own returns. But since they have been uncovered, the DOC has required all inmates filing returns to use IRS volunteers provided to the department to assist inmate workers.

"South Carolina DOC has been very proactive in working with us. They have banned tax returns coming into those prisons, but the inmates are still finding ways, through visitation, mail, [and] people on the outside," said Hunter.

Enhancements by IRS

According to Hunter, the IRS is also working on new enhancements to stop refunds from ever getting to the prisoners. He said those improvements are still in progress, but noted that the technological enhancements of filing tax returns have made it necessary to track more closely where they refund checks are going.

"With direct deposit, now individuals who are getting a refund just put a bank account [number] so one of the things we look for is multiple checks going to one back account. A couple of checks going to an account might be ok, a husband or wife filing separately, but of you get 40 or 50 going to one account it is raises a red flag," Hunter said.

According to Al Patton Deputy Director of the Office of Refund Crimes for the IRS, last year the IRS stopped 18,000 fraudulent tax returns filed by prisoners from being processed, but the IRS can use more help.

"We have 35 field offices with coordinators that liaison with the prisons to make sure if the prisons have information that [fraud] is ongoing we want to know about that information and have it forwarded on and stop the refunds," he said.

Patton said that if other prisons systems, like South Carolina, made tax forms and materials contraband, then it would assist the IRS in stopping fake tax filings by inmates.

The IRS is open to other types of interfaces with prison systems as well.

"We stand ready to liaison with the prison officials. Refund fraud perpetuates and it is ongoing throughout the country. We stand ready to make sure the contact points [in our offices] can get information about refund schemes," said Patton.

Patton said the IRS is also working with corrections agencies and the Bureau of Prisons to obtain inmate data to cross check against IRS databases.

Once a refund is issued, then the money trail can also be a red flag for prison administrators who may notice the new and unexplained wealth of an inmate around tax time.

This is something that corrections departments all over the country should take interest in, say IRS officials.

"Prior to coming to South Carolina, I was deputy director of refund crimes and we were responsible for fraud returns. We have had a major problem in other corrections departments in Florida and California," Hunter said.

Congressmen from Florida recently found this out when local media there uncovered a tax refund scam by inmates in their state.

Florida Scam Raises Ire

Recent reports by two Tampa-based TV stations, which interviewed several Florida inmates, uncovered a tax scheme similar to the one in South Carolina's. The inmates filed the returns with bogus information about their work history and were able to receive refunds with help from others on the outside, according to reports by WESH-TV and WTVT-TV.

The investigations into the fraud are in their infancy but Florida Department of Corrections spokesman Sterling Ivey said that the department is prepared to provide any information is has to the IRS.

"We get involved by notifying the IRS when we learn of potential scams, then we support them with any assistance they need. Occasionally, we find suspicious information through the prison mail room, but most of the time we learn of the activity from inmates," he said.

Meanwhile, several Congressmen from the area are trying to raise awareness about the scams. Two Florida Congressmen, Ric Keller and Tom Feeney, took the lead in this effort by writing letters to the IRS.

According to Diane Pratt-Heavner, spokesperson for U.S. Rep. Jim Davis of Tampa, Davis also contacted the IRS commissioner about the Florida scam and asked that the IRS look into it.

"He had a conversation with the IRS commissioner. We felt we got across to them the urgency about it. We asked them to look into it and the commissioner said he would talk to the Florida Governor's office or [Florida] Department of Corrections about it," said Pratt-Heavner. "We were afraid it wasn't just in Florida."

Patton, when questioned about the Florida scam, said the IRS could not confirm or deny that an investigation was underway. But Pratt-Heavner said that the FBI is looking into the scam and the House Ways and Means Committee is interested in possibly holding hearings on the extent of the fraud.

What they may uncover is how difficult it is to track scams such as these.

According to Ivey of the Florida DOC, tax scams can be particularly difficult to expose.

"Because the scams require the involvement of a lot of people both inside and outside the prison, it is increasingly more difficult to uncover," he said.

Sheppard of South Carolina agrees. Even after making tax materials contraband, his investigators are still finding fraudulent tax forms.

"The inmates are still doing it. We have found as many as 20 or 30 at a time. Someone has made them out and they smuggled them out," he said.

Hunter said corrections agencies also have reason to want to uncover these schemes. As inmates have more money at their disposal, they can use it to bring other types of contraband into the prison as well, he said.

"It's a major problem here. If they don't have the money they can't [bring it in]," he said.

Resources:

To report tax fraud, call the IRS at 800-829-0433.