Inmate Tax Fraud: $100 Million Crime

NBC Bay Area’s Investigative Unit uncovers tax fraud in California prisons from inmates filing thousands of fraudulent returns. It’s part of a national problem that cost taxpayers hundreds of millions of dollars last year.

Tax refund fraud among the nation’s prison population has grown more than 1,000 percent in the last decade according to the latest data obtained by NBC Bay Area’s Investigative Unit from the Treasury Inspector General for Tax Administration in Washington, D.C.

The Inspector General told NBC Bay Area that in the last tax year the IRS caught and stopped more than $1.7 billion in fraudulent tax refunds filed by prison inmates.

He said of millions of more tax dollars actually get sent to inmates in the form of tax refunds that are not due to them.

For a closer look into how this prison tax fraud scam works, NBC Bay Area went to a person who  ran the scam for years while behind bars.

His name is Dwayne Selvey. But on the inside everyone knew him as the “tax man.”

For anywhere between $100 to a $1,000 payoff, he would file fake tax returns for fellow inmates.

“It was just free money,” Selvey told NBC Bay Area. “I told my friend, ‘I think I’ll file some taxes.’ And he told me he said, man, the FBI, the federals, they [are] going [to] get you. I said ‘No, I don’t think so. I’m gonna try it anyway.’”

And for years, Selvey said he filed fraudulent income tax forms, sometimes hundreds at a time. He got back $300,000 to $400,000 a year in refunds he was not due.

Selvey would use the real name and Social Security numbers of inmates, friends and family members. Then he would fill out fake income information to make it appear they were due a refund.

Selvey said he usually asked for a refund between $3,000 and $6,000 on each return. Any amount higher than that would draw the attention of the IRS, according to both Selvey and two other inmates who also ran the scam and spoke with NBC Bay Area.

According to federal Treasury investigators, Selvey is just one of thousands of inmates across the country and California filling out fraudulent tax returns.

The latest numbers from the IRS reported to Congress show in that 2009, the IRS intercepted 44,944 fraudulent returns nationwide from prison inmates doing time for crimes ranging from from robbery to rape, assault to murder. A total of 3,713 came from convicts in California prisons.

To search fraudulent tax returns by state, click here.

NBC Bay Area found 42-year-old Samuel Warren, a registered sex offender from Antioch, was one of them. US District Court records show that in 2007 and 2008 while serving a 10-year sentence in San Quentin for rape and sexual battery, Warren and his wife teamed with two other people to file 790 fake returns which, according to the Federal criminal complaint, prompted the IRS to issue approximately $2.6 million in refunds they were not due.

All four pleaded guilty to their roles in the scheme in late 2010 and 2011 and each spent time in federal prison for the scam.

Click here to read the criminal complaint in Samuel Warren’s case filed in US District Court.

Abel Robledo is another registered sex offender, who, according to US District court records teamed up with his wife, an IRS employee, to file fraudulent tax returns while serving a four-year sentence at Wasco and Corcoran State Prisons for assault and intent to commit sexual assault.
The husband and wife filed false tax returns and received 18 thousand dollars in refunds.

Click here to read the criminal complaint in Abel Robledo’s case filed in US District Court.

“I actually had it so good inside the prison system there really was no need to get out,” Selvey told NBC Bay Area. “It came through easy, so simple.”

Selvey’s fake tax return enterprise in the prison system started with a commercial he saw for tax services back in the early 90s, while serving time in South Carolina. He decided to try filing for himself, even though he had no income.

For Selvey, it was a gold mine.

“I said, ‘Well, that was pretty good. I’m rich’,” he said.

For the next decade, Selvey’s business grew, until the IRS tracked him down for questioning in 2001. During that time, he believes fraudulent returns he filed netted between $3.5 million and $4 million  in ‘free money’ for himself.

Selvey was convicted of defrauding the federal government and moved to federal prison for his tax crimes. He was recently released, but says the problem continues to grow and the numbers show it.

The Treasury Inspector General for Tax Administration released a report in December of 2012 that shows the fraudulent refunds issued to inmates is on the rise, but the number of returns being caught is growing as well.

“We’re talking billions of dollars being requested,” J. Russell George, the Treasury Inspector General for Tax Administration, overseeing the IRS, told the Investigative Unit in a Washington, D.C., interview.

The inspector’s 2012 report details some of the efforts going into fighting the crime, including the United States-Korea Free Trade Agreement. As of last September, the law requires all state prisons and Federal Bureau of Prisons provide a list of all inmates to the IRS to facilitate cross referencing with names and Social Security numbers on tax returns. Even though most prisons were offering the information on a volunteer basis, the law mandates the practice.

“It is a serious problem and it is a growing problem,” George said. “The fact that prisoners, people who have been convicted of crimes, are able to manipulate the tax system to their advantage and for many years undetected and at a growing rate is something that must be taken seriously and is of great concern.”

While the IRS believes it caught 94 percent of the fraudulent returns filed in 2012, the Inspector General admits that they are not catching all of the fraud taking places through this scheme.

“We’re still talking hundreds of millions of dollars [that gets through and is paid to inmates]. And that’s outrageous,” George said, emphasizing there are still improvements to be made in how the government detects fake returns from inmates.

“It’s not acceptable. I mean, honest hard-working American taxpayers should not be able to have his or her burden increased by someone cheating the system, gaming the system,” George said. “And that’s what’s occurring.”

At the California Department of Corrections and Rehabilitation, a spokesman told NBC Bay Area that the department wants to stop the crime, but ultimately it is up to the IRS.

“We’ve certainly been aware along with many people that in recent years there is a problem,” Jeffrey Callison with CDCR in Sacramento told the Investigative Unit. “We’re working on a more formal agreement with the IRS.”

IRS officials both here in California and in Washington, D.C, declined NBC Bay Area’s request for an interview, but said in a statement, “When the accurate prisoner data is available the IRS is very successful at detecting and stopping incorrect refunds” and “there are still significant challenges in getting complete and consistent data from the multiple jurisdictions involved.”

To read the full IRS statement click here.

Even though the IRS would not speak with NBC Bay Area on camera, a retired IRS agent who worked these prison tax refund fraud cases told the Investigative Unit, she thinks inmate tax fraud needs to be prioritized.

“As soon as you shut down one scheme another scheme develops” said Jacque Riordon, a retired special crimes investigative agent for the IRS told the Investigative Unit.

Riordon worked for years to try to catch and stop these tax fraud scams. According to Riordon, part of the problem is the criminals are already locked up.

“It is very difficult because the IRS actually has competing priorities, said Riordon. “On one hand you have the IRS wanting to process returns and get refunds as quickly as possible," she said. "Then on the other side of the house you want to make sure you stop all of the fraudulent schemes and that takes time and resources that the IRS doesn’t necessarily have.”

Congress is scheduled to begin holding hearings to discuss this issue on April 10, 2013. But this isn’t the first time that Congress has tried to tackle inmates stealing tax dollars. They had hearings on this issue in 2005 when the IRS pledged to do better.

Click here to read the original Treasury Inspector General’s report on this issue published in 2005.

But the Treasury Inspector General, J. Russell George, whose office oversees the IRS, said the tax agency can and should do better at stopping this fraud.

“It’s astounding in especially in the sense that people are aware of the problem and have been made aware of it for again, almost ten years by the work that my organization has done,” George said.  "And yes, Congress has taken some steps to address it. But [the fraud] is continuing and, again, most concerning is it’s growing. And that’s troubling.”

George said the IRS should put a higher priority on stopping the inmate tax refund schemes, use technology to track and match bogus tax returns and devote more resources to arresting and prosecuting those who continue to try to ‘game’ the system.

As for Selvey, he said he is remorseful for his crime and pledged he won’t go back to committing tax fraud. He’s now looking for a job, but says, the crime behind bars goes on without him.

“You got all these people out here in society working and paying taxes [legitimately] and then you got criminals coming along and taking these people’s money and I don’t feel good about that, that I actually scammed or schemed these people out of their money,” he said.

“They lost billions and billions of dollars over the year and they continue losing it.”

How do you think inmate tax fraud should be stopped? Tweet us @stephenstocktv @putnamproducer

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