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2 Investigators: Inmates Are Filing Fake Tax Returns

CHICAGO (CBS) -- During some of our toughest economic times, $39 million of your tax money was sent to prison inmates. 

That was in 2009; millions more had been sent in prior years. 2 Investigator Dave Savini looks at a tax scam that inmates have been committing against taxpayers and why some people say the IRS is partly to blame.

Prison inmates are getting tax documents and using friends, or stolen identities, to file false tax returns and rake in the cash. Two prison inmates, who did not want to be identified, told CBS 2 it was easy cash.

A convicted killer serving a life sentence in Florida says inmates are taking in millions of dollars. In fact, a South Carolina prison inmate collected $3 million in bogus tax return money before he was caught.

"It's the easiest thing I ever learned to do is file taxes," the South Carolina inmate said.

Illinois inmates have been running the same scam, the IRS knew it, but reportedly never shared the information with prison officials in most states and the federal system. 

In just 2009, 1,983 bogus Illinois inmate returns were caught by the IRS.  Sheridan Correctional Center had the highest count with 173 filings.  What is not being said by the IRS, is how many Illinois prisoners actually received fraudulent refunds and for how much.

Illinois Department of Corrections Chief of Staff Cara Smith says her agency launched an investigation after CBS 2 contacted IDOC about the tax scam.      

"We were outraged," Smith said. 

Smith says IDOC is now working with the IRS to crack down on this fraud. 

"We'll use their specific information to deal with any fraud that's been committed by inmates in our custody," she said.

J. Russell George, the inspector general overseeing the IRS, has for years been calling for a crackdown on this type of scam. In 2005, an inspector general report warned the scam was growing at an "alarming rate."  Since then, it has gotten worse. 

"I won't rest until the IRS does what it's supposed to do," George said.

An even more skeptical opinion of the IRS comes from Jim Tobin of the National Taxpayers United of Illinois.

He says the IRS could have stopped a lot of this fraud years ago and that the IRS also has failed to prosecute inmate tax cheats.

"That's how incompetent the government is," Tobin says.

As we head into yet another tax season, the IRS is still not sharing information with state and federal prison officials, according to a December inspector general report.

The IRS, in a statement, says it takes refund fraud seriously and its systems provide special scrutiny to reviewing prisoner refunds. The statement also says the IRS is stopping more prisoner refunds than ever before.

However, the IRS has not completed agreements with prison systems so that they can share taxpayer data.

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