Ivan was afraid that he'd die working in the water plant before his sentence was up, so he slipped out of the barracks at night after a deputy on duty decided to go take a little "break" with one of Anson's girls. Ivan snuck out, hid in a water barrel, and got shipped out with a water caravan bound for Fort Abandon, where he still is. He is indeed guilty of the crime he was convicted of (theft), but he's not the healthiest of people.
Find and return Ivan, the escaped worker: Sheriff O'Connor wants the Prisoner to find Ivan and bring him back alive. If O'Connor can't be convinced to spare Ivan and give him a healthier job, which gives half the original reward, he will be publicly executed and then hung in the plant as an example. Alternatively, if Ivan was killed at Fort Abandon or the Prisoner uses Deception to lie to O'Connor saying Ivan was already dead, there is no reward.
The actual hanging wasn't going to be shown to the player, there instead would be a deputy escorting him to the gallows, followed by fade-out/fade-in, and Ivan's corpse dangling from a rope, swaying in the wind.