My friend unintentionally got involved in a scam and might go to jail

My best friend (18m) just told me that someone reached out to him requesting an art commission. He charged the person $25 for the commission after discussing details. The person ended up sending $1000, and then my friend told him that he could not receive that $1000 because there is a limit on his account for how much money he can receive. So the sender sent an additional $400 to bypass the limit. However now the sender is wanting the money sent back, and my friend is unable to send back the money that was sent to him because of some technical issues with PayPal. But he did not ask this sender for such an absurd amount of money, the sender chose to do that even though my friend made it known that he only charges $25. But the sender is threatening to call the police for fraud. What do we do? we are located in NYC

update: my friend accidentally closed his PayPal before we could resolve the issue. are we screwed?