Inferno Island is a prison in the middle of the sea. It was only seen in the episode The Inmates of Summer where SpongeBob SquarePants and Patrick Star got sent there by accident, thinking it was summer camp. It has a warden that is extremely harsh and strict to the prisoners and his own colleagues.
The island is essentially the underwater equivalent of Alcatraz Island. It is stationed upon a rocky formation that appears to frequently go through frequent, harsh thunderstorms.
Inferno Island appears to be somewhat close to Sun Fun Island, since boats from each island pick up their people (campers/prisoners) on the same dock and also because the counselor was able to get to the island in a raft.