On July 7, 2011, the Department of the Treasury’s Inspector General for Tax Administration (TIGTA) issued a telling report. TIGTA found that unauthorized workers who are ineligible to obtain Social Security Numbers (SSNs), the vast majority of whom are illegal immigrants, were paid $4.2 billion in refundable tax credits in 2010.

Any individual who earns income in the U.S., be it legally or illegally, is required by law to pay income taxes. As a former Internal Revenue Service (IRS) Commissioner stated, “The IRS’s job is to make sure that everyone who earns income within our borders pays the proper amount of taxes, even if they may not be working here legally.” To this end, the IRS issues unauthorized workers a nine-digit Individual Taxpayer Identification Number (ITIN).

ITIN filers are eligible to claim both the Child Tax Credit (CTC) and the Additional Child Tax Credit (ACTC). The ACTC is the refundable portion of the CTC; in other words, it is a check that the IRS writes to filers with no net income tax liabilities. In the late 1990s, the majority of taxpayers could not claim the ACTC and those who could received at most $500 per qualifying child. In 2001, however, the Bush tax cuts increased access to the ACTC and allowed taxpayers to claim up to $1,000 per qualifying child. Access to the ACTC was further expanded with the passage of the stimulus in 2009.

As a result of these changes, the number of ACTCs claimed by ITIN filers has been steadily climbing. ITIN filers claimed $161 million in ACTCs in 2001, $924 million in 2005, $2.1 billion in 2008, and $4.2 billion in 2010. Additionally, many ITIN filers are submitting tax returns for multiple years and thereby claiming credits retroactively. In 2010, approximately 238,000 ITIN filers submitted tax returns for multiple years. Nearly 9,000 of these filers claimed a total of at least $10,000 in ACTCs.

The 2011 TIGTA report also points out that for five years ITIN filers have been claiming more in refundable credits than they have been paying in income taxes, resulting in a net outflow of IRS funds. With the ACTC expansions this net outflow has been steadily climbing, amounting to $280 million in 2005, $430 million in 2006, $590 million in 2007, $1.12 billion in 2008, $1.82 billion in 2009, and $3.13 billion in 2010.

Many ITIN tax returns are based on false income statements, stolen Social Security Numbers, and other forged documents. For example, the TIGTA report examined a sample of 250 ITIN returns for 2009 that had been flagged as potentially fraudulent by the IRS’s Electronic Fraud Detection System. The report found that approximately 91 percent of these returns claimed a CTC or ACTC. Overall, ITIN filers are more than five times as likely as SSN filers to claim the ACTC.

Furthermore, the report claims that the IRS has done little to deal with the prevalence of identity theft and routinely fails to notify individuals whose names, SSNs, or credit card numbers have clearly been stolen. This is a serious problem because, to quote the report, “Without a process in place to timely notify taxpayers when there is evidence of identity theft, taxpayers’ credit cards, bank accounts, and other related accounts could be at risk.”

According to IRS insiders, tax return processors are systematically encouraged to ignore cases of obvious identity theft. As several whistleblowers told News 13 WTHR Indianapolis in May, in order to receive a pay raise and positive evaluation, ITIN processing agents must file a certain number of tax returns per hour. When asked how processors are told to handle ITIN returns listing SSNs that have obviously been stolen, one whistleblower told the news station, “The IRS guidance on this says you file the tax return using their ITIN number, attach the W2 to the return and from there, they handle it. And how they handle it is they pay out thousands and thousands of dollars on those."

Moreover, the high incidence of fraudulent ACTC claims stems largely from the fact that the IRS verifies neither the residency nor the citizenship status of the children for whom the refundable credits are issued, despite the fact that the agency’s website lists both of these as necessary criteria for claiming the ACTC. One Indiana tax preparer told News 13 that it is not uncommon for ITIN filers to list 10 or 12 dependents on their income tax returns. The news station reported a specific case in which four undocumented workers claimed nearly $30,000 in ACTCs by using a false address. None of the 20 children in whose names the ACTCs were claimed had ever visited the U.S., let alone acquired U.S. citizenship or resident alien status.

This vulnerability has opened the door to fraudulent claims, and, according to the TIGTA report, “provide[d] an additional incentive for aliens to enter, reside, and work in the United States without authorization.”

The IRS is claiming that it does not possess the legal authority to disallow the ACTC to ITIN filers. It said in a statement, “The IRS administers the law impartially and applies it as it is written. If the law were changed, the IRS would change its programs accordingly.” Clearly, the government needs to reconcile its taxation and immigration policies. The current policy sends illegal aliens a mixed message, whereby one bureaucratic agency deems their very presence in this country illegal, while another gives them an identification number so that they can file income tax returns.

House lawmakers have already taken action to address this inconsistency. On May 10, the House passed a budget reconciliation package that would deny ACTCs to taxpayers who do not file with a valid SSN. Meanwhile, Senate Majority Leader Harry Reid (D-Nev.) has been blocking the Child Tax Credit Integrity Preservation Act (S. 577), which would similarly ensure that ITIN filers cannot claim the ACTC. The Joint Committee on Taxation (JCT) estimates that denying the ACTC to ITIN filers would save taxpayers $1 billion in 2014 and roughly $7.6 billion over a decade. If anything, this estimate is conservative since it assumes that in 2013 the value of the CTC will revert back to $500 and the loosened restrictions enacted in 2009 will expire.

Despite the JCT’s savings projections, a number of lawmakers, including House Budget Committee Ranking Member Chris Van Hollen (D-Md.) and Rep. John Lewis (D-Ga.), are arguing that ITIN filers should continue receiving CTCs and ACTCs for two main reasons. First, they argue that a change to the current policy would have an adverse impact on the children of illegal immigrants, many of whom are legal citizens or were brought to the U.S. through no fault of their own.

Second, lawmakers are pointing to the payroll and sales tax contributions of undocumented workers, much of which funds entitlement programs, like Social Security and Medicare, for which illegal immigrants are not eligible. Organizations like the Economic Policy Project at the National Council of La Raza concur and claim that, on net, illegal immigrants benefit America’s fiscal health. According to the Institute for Taxation and Economic Policy, undocumented workers paid $11.2 billion in taxes in 2010. In 2010 the Social Security Administration’s chief actuary estimated that undocumented immigrants had paid between $120 and $240 billion into the Social Security Trust Fund as of 2007.

Our government’s taxation policy with respect to illegal aliens is confusing at best. On the one hand, it is redistributing the tax dollars of lawful citizens to undocumented immigrants, oftentimes in the form of refundable credits for children who do not reside in the United States. Meanwhile, the government is accepting money from undocumented workers in order to fund programs for which they are not eligible. Both for the sake of fairness and our nation’s fiscal health, these policies ought to be reformed.

- Maddie Eldridge