NEW YORK, April 14, 2005 -- As an inmate incarcerated in a Florida state prison, Daniel Naple came up with a scheme that left him flush with cash and able to live like a king.
"I had my bed made for me, I had my food brought to me, I had a newspaper laid on my bed every morning," he said. "There was just so much money, it was unbelievable."
Naple, 53, now free, was among the first to figure out a now-infamous prison scam to defraud the Internal Revenue Service. Using the names of fellow inmates at the Glades Correctional Institution in Belle Glade, Fla., he says he filed hundreds of false tax returns, using the names of major companies to create fictitious W-2 forms in the prison library.
It was made to appear as if the inmates had jobs, had taxes withheld and were due a refund.
"We just went hog-wild with it," he said. "Say if we used one year a name on Gillette, the following year we'd use that same name and Social Security number on General Motors. And so every year it just kept building and building."
A convicted car thief, Naple says he collected hundreds of thousands of dollars from 1989-1990 before the IRS finally caught on. He says he had two co-conspirators, one who helped smuggle the tax forms out of the prison and mailed them to the IRS, and one who would pick up and cash the refund checks that had been sent to post office boxes Naple had set up.
Naple was sentenced to six years in federal prison, and forced to pay $57,008.30 in restitution to the IRS.
The phony refund scam has now spread to prisons across the country. There are now about a half-million inmates who legitimately file for refunds from prison, according to the IRS, making it all the more difficult to catch the scammers.
Millions Lost in the System
The IRS says it stopped $53 million in fraudulent prisoner refunds last year, but that more than $10 million slipped through the cracks.
"They attempt to enlist either family members, friends or people outside of prison to assist them," said Nancy Jardini, chief of criminal investigation for the IRS. "They have in some instances worked in concert with correctional officers to assist them in achieving their fraud."
Hundreds of inmates are prosecuted every year, but the IRS concedes it cannot go after everyone. Likewise, tracking down the money once the prisoners have cashed the refund checks is often difficult.
"It's a game, it's a game and something of a free shot," tax consultant Jack Blum said. "There's not much downside, and if they score, wonderful."
The heart of the problem is that the IRS computers cannot quickly verify whether a W-2 form is legitimate.
"You could stop it if you decided not to give refunds until you were sure the person deserved it," Blum said. "But if you did that, 100 million Americans who deserve refunds would wait years for their refund check, and that would be completely unacceptable."
And inmates have been quick to capitalize.
"I could do one today and send it tomorrow and we could have a check in your mailbox in a couple of weeks," Naple boasted.
ABC News' Jill Rackmill, Maddy Sauer and Jessica Wang contributed to this report.