IG: IRS Made ‘Policy Decision’ to ‘Legalize Illegal Aliens;’ Ended Up Paying Illegals $4.2B in Refundable Credits in 1 Year

Terence P. Jeffrey | July 12, 2013 | 4:28am EDT
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By giving illegal aliens a tax identification number and allowing them to file tax returns as if they were citizens or legal immigrants, the IRS, according to the Treasury Department Inspector General for Tax Administration, was opening the door for illegal aliens to receive tax benefits Congress had intended for U.S. citizens. (AP File Photo)

(CNSNews.com) - The question of whether to legalize illegal aliens and put them on a pathway to citizenship may be the most controversial legislative issue facing the U.S. Congress this year.

But, according to the Treasury Inspector General for Tax Administration (TIGTA), seventeen years have already passed since the Internal Revenue Service made its own “policy decision” to “’legalize’ illegal aliens.”

That policy, made those many years ago, not only determined that the IRS would treat illegal aliens the same as legal immigrants and U.S. citizens, but also that the IRS would not hand over to federal immigration authorities information about employers who appeared to be hiring large numbers of illegal aliens and about illegal aliens who filed false documents with the IRS.

As a result of the IRS's policy, by 2010, according to TIGTA, the service was paying out $4.2 billion in refundable "Additional Child Tax Credits" to illegal aliens. In 2011, according to TIGTA, the IRS would pay more than $46 million in tax refunds to what theoretically were 23,994 illegal aliens who all used the same address in Atlanta.

The story starts in 1996, when Democrat Bill Clinton was president, and the Republicans controlled Congress.

On May 2, 1996, the Senate voted 97 to 3 to approve the Illegal Immigration Reform and Immigration Responsibility Act. This vote inspired Sen. Ted Kennedy to go down to the Senate floor and proudly proclaim that the Senate had taken bipartisan action to stop illegal immigration and protect American workers.

“This legislation, I think,” said Kennedy, “will be extremely important and, I believe, effective in stemming the tide of illegals, not just because of the expansion of the border patrols, although that will have some effect, and not just because of the increased penalties in smuggling, as all that will have an effect; it will have an important impact in helping American workers get jobs and be able to hold them and have the enhanced opportunity for employment.”

Four months later, on Sept. 25, 1996, a House led by Speaker Newt Gingrich approved the bill 305 to 123. President Clinton signed it on Sept. 30, 1996.

Section 642 of this law said that no other law or official could bar any agency or official from providing information about illegal aliens to the Immigration and Naturalization Service--the agency then responsible for enforcing immigration law.

“Notwithstanding any other provision of federal, state, or local law, a federal, state, or local government entity or official may not prohibit, or in any way restrict, any government entity or official from sending to, or receiving from, the Immigration and Naturalization Service information regarding the citizenship or immigration status, lawful or unlawful, of any individual,” said the law.

“Notwithstanding any other provision of federal, state, or local law,” it said, “no person or agency may prohibit, or in any way restrict, a federal, state, or local government entity from doing any of the following with respect to information regarding the immigration status, lawful or unlawful, of any individual: (1) Sending such information to, or requesting or receiving such information from, the Immigration and Naturalization Service. (2) Maintaining such information. (3) Exchanging such information with any other federal, state, or local government entity.”

On May 29, 1996—after this bill passed the Senate but before it passed the House—the IRS issued a regulation that contradicted it.

This regulation said the IRS would grant what it called Individual Taxpayer Identification Numbers (ITINs) to aliens who did not qualify to work in the United States and did not qualify for Social Security Numbers. The IRS had three basic requirements for people receiving these numbers: 1) they had to be an alien, 2) they could not be qualified to work in the United States or have a Social Security Number, and 3) they owed taxes in the United States.

In issuing this regulation, the IRS said Section 6103 of the Internal Revenue Code would apply to the aliens it granted these ITINs. Section 6103 says the IRS must keep tax information confidential and, with a few exceptions, may not share that information with other government agencies.

In September 1999, the Treasury Inspector General for Tax Administration, which has oversight over the IRS, published an audit report on the ITIN regulation. It was titled, “The Internal Revenue Service’s Individual Taxpayer Identification Number Program Was Not Implemented in Accordance with Internal Revenue Code Regulations.”

The IG pointed out that the IRS’s claim that it could issue ITINs to illegal aliens and then decline to provide information about those illegal aliens to the federal immigration enforcement agency—then called the Immigration and Naturalization Service (INS)--contradicted the terms of the 1996 immigration reform law.

“The IRS provides disclosure protection to illegal alien applicants,” said the IG. “The Congress has clearly stated how the federal government is to communicate between agencies concerning illegal aliens. The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (the Illegal Immigration Reform Act) states that information concerning illegal alien status should be provided to the Immigration and Naturalization Service (INS) notwithstanding any other law.

“However, in the ITIN regulations issued on May 29, 1996, the IRS states, ‘Generally, tax return and tax return information are confidential, as required by 26 USC 6103,’” said the IG. “Therefore, the IRS assurance of anonymity seems to be in conflict with a federal statute.”

The IG determined it was the IRS’s deliberate intention to withhold information about illegal aliens from the INS.

“IRS management and the Office of Disclosure Litigation indicated that the IRS intentionally will not provide information to the INS,” said the IG report. “The rationale for this policy is that the Illegal Immigrant Statute is a ‘general’ statute and does not change IRC Section 6103.”

By giving illegal aliens a tax identification number and allowing them to file tax returns as if they were citizens or legal immigrants, the IRS, according to the IG, was opening the door for illegal aliens to receive tax benefits Congress had intended for U.S. citizens.

“Some of the tax advantages that are being realized by illegal aliens treated as residents include receiving spousal exemptions, standard deductions, and even some erroneous earned income credits,” said the IG.

In sum, the IG concluded, despite the 1996 immigration reform law, the IRS had made its own policy decision to simply “legalize” illegal aliens.

“The Internal Revenue Service (IRS) made a policy decision to issue IRS Individual Taxpayer Identification Numbers (ITINs) to illegal aliens so tax filing obligations could be met,” said the IG. “This IRS policy, to ‘legalize’ illegal aliens, seems counter-productive to the Immigration and Naturalization Service (INS) mission to identify illegal aliens and prevent unlawful alien entry.”

In a November 2002 followup report, the IG said the IRS’s policy of issuing ITINs could be helpful to terrorists.

“Based on national security risks, the ITIN process is an area of vulnerability and concern,” said the IG. “With an accepted form of government-issued identification like an ITIN, it is easier for terrorists and their sympathizers to operate in an open society while planning hostile actions.”

In January 2004, in response to concerns raised by then-Senate Finance Chairman Charles Grassley (R.-Iowa), TIGTA published another report about the problems caused by the IRS’s policy toward illegal aliens.

This report revealed that the number of tax returns filed by “unauthorized” aliens using ITINs was increasing, raising concerns about illegal aliens committing identity theft—by using stolen Social Security Numbers—and raking in refundable tax credits, such as the Additional Child Tax Credit.

On July 18, 2003, TIGTA’s Assistant Inspector General for Audit Gordon C. Milbourn sent a memorandum to then-IRS Commissioner Mark Everson citing TIGTA’s concerns.

“Specifically, unauthorized resident aliens filing U.S. Individual Income Tax Returns (Form 1040) identified with an ITIN would qualify for accelerated disbursements of the Child Tax Credit (CTC) and the Additional Child Tax Credit (ACTC),” Milbourn wrote.

He then restated TIGTA’s concern that issuing ITINs to illegal aliens conflicted with congressionally enacted immigration law—this time citing the 1986 amnesty law.

“The presence of the Form W-2 issued in the filer’s name indicates that employment was secured,” wrote Milbourn. “Therefore, these resident aliens were apparently employed without authorization. Consequently, we believe that the IRS is at risk of conflicting with the Immigration Reform and Control Act of 1986, which was designed to prevent unauthorized resident aliens from working in the U.S.”

Then Milbourn noted that tax returns that had a Form 1040 using an ITIN given to an illegal alien but that reported income on a W-2 using a Social Security Number indicated that the alien in question was not only working illegally in the United States but may be committing identity theft.

“[S]ome paper-filed returns appear to have been submitted to the IRS with inconsistent identification information, since the Form 1040 showed an ITIN and the filer’s Form W-2 showed and SSN,” wrote Milbourn. “This SSN often belonged to another person, indicating potential identity theft.”

In its January 2004 audit report TIGTA noted that it was a felony for someone to use someone else’s Social Security Number or a fake one. The report also noted that the apparent misuse of Social Security Numbers was not uncommon on tax returns filed by aliens using ITINs.

“The Social Security Act provides that whoever, with the intent to deceive, falsely represents a number to be his or her SSN when, in fact, that number was not assigned to that person, shall be guilty of a felony and subject to a fine,” said the report.

“Government agencies reported that hundreds of thousands of unauthorized resident aliens have used fraudulent documents, including Social Security cards to obtain employment,” said the report.

“Unauthorized residents submitted to the IRS an estimated 309,000 paper filed tax returns with an estimated 354,000 SSNs on Forms W-2,” said the report. “These Forms W-2 included 265,000 SSN that are assigned by the SSA to other individuals.”

The report also said they included 89,000 Social Security Numbers that the SSA had never assigned to anyone.

TIGTA noted that SSA Inspector General James G. Huse had testified in Congress that the misuse of Social Security Numbers had helped the Sept. 11, 2001 terrorists.

“The Inspector General stated that improperly obtained SSNs were a factor in the terrorists’ ability to assimilate themselves into American society while they planned their attacks,” said the report. “The events of Sept. 11, 2001 heightened the urgency of protecting the integrity of SSNs.”

This 2004 TIGTA report recommended that IRS work with the Bureau of Citizenship and Immigration Services and the SSA on seeking new legislation on sharing IRS information on illegal aliens.

The IRS reiterated its position that, as it stood, Section 6103 blocked it from sharing information about illegal aliens with immigration enforcement.

“BCIS and SSA are knowledgeable about the type of information collected by the IRS,” the service said in its response to the audit. “A legislative change to Section 6103 of the code is needed before IRS can share tax information with these agencies.”

Meanwhile, the inspector general of the Social Security Administration began focusing on a corollary problem: Some businesses were filing massive numbers of bad W-2 forms for their workers—on which the names and the Social Security Numbers did not match. Because it could not assign credit for the Social Security taxes paid on these W-2s to an identifiable taxpayer, the Social Security Administration credited the money to an accounting limbo called the “Earnings Suspense File” (ESF).

“According to SSA officials, illegal aliens may be major contributors to this problem,” said a Feb. 7, 2000 audit report from SSA’s IG. “SSA suspects that employers in certain high turnover industries (bars and restaurants, services, and agriculture) compound the problem because they may knowingly hire illegal aliens with fraudulent identification and are able to do so because there are no penalties imposed for their actions. Consequently, those employers who knowingly accept fraudulent documentation are free to conduct business as usual without regard to the disruption and harm caused to SSA's customers and to unknowing individuals whose identities are falsely used.”

The SSA said that it had wanted to provide information from this file to the Immigration and Naturalization Service to help the INS identify employers who were habitually hiring illegal aliens but discovered that “privacy and disclosure limitations” would block the SSA from sharing information with the INS.

“The INS has oversight responsibility for illegal aliens,” said the IG. “SSA has the capability to provide the INS with valuable leads to identify employers who continually hire illegal aliens.

“The Agency included a project to collaborate with the INS in its December 1997 version of the ESF Tactical Plan,” said the IG. “The initiative was to involve SSA working with the INS to formulate and conduct a limited review of employers who (1) employ large numbers of immigrants and (2) experience high name/SSN error rates on their AWRs. SSA planned to use the results of this effort to revise, if necessary, current SSA policies, procedures, and systems as well as IRS regulations relating to AWR requirements. Because of privacy and disclosure limitations, the Agency determined it could not share such information with the INS, according to SSA officials. SSA subsequently dropped the project from later versions of the ESF Tactical Plan.”

Four years later, in October 2004, the SSA IG published another audit report revealing that employers who habitually filed the largest number of no-match W-2s were concentrated in certain industries in certain states--and that some of these employers were filing many thousands of bad W-2s year after year.

One habitual no-match W-2 filer was a state government agency. The most egregious was an employer based in Illinois.

“Our analysis of the Top 100 employers by industry determined that the highest contributors of items to the ESF were concentrated in three industries: services, restaurants, and agriculture,” said the SSA IG. “We found that 95 of the Top 100 employers were in 1 of these 3 industries, representing 2.6 million wage items and over $9.1 billion in wages over the 5-year review period. Forty-three of the Top 100 employers were in the service industry, 32 were in the restaurant industry, and 20 employers were in the agriculture industry. Four of the remaining employers were in the hotel/retail industry, and one was a State agency.”

“We found that 54 of the 100 employers had registered addresses in three States – California, Texas, and Illinois – representing almost 1.5 million wage items and over $4.8 billion in wages during TYs 1997 to 2001,” said the IG.

The Illinois company that had the worst record had filed 131,191 no-match W-2s in tax years 1997 through 2001.

In the years since the IRS made its “policy decision” to “legalize illegal aliens,” the amount of money paid to illegal aliens through the refundable Additional Child Tax Credit (ACTC) has grown.

“In TY 2007,” said a March 2009 TIGTA audit report, “more than 1.2 million (66 percent) ITIN filers received ACTCs of almost $1.8 billion. The ACTC is a refundable credit available to individuals with no tax liability.”

At that time TIGTA recommended that Congress pass legislation to specifically bar the ACTC from going to tax filers who do not have Social Security Numbers—i.e. aliens.

“We believe legislation is needed to clarify whether or not refundable tax credits such as the ACTC may be paid to filers without an SSN,” said the 2009 audit report. “Such a legislative change could result in cost savings to the federal government of $1.8 billion annually ($8.9 billion over 5 years). As it now stands, the payment of federal funds through this tax benefit appears to provide additional incentive for aliens to enter, reside, and work in the U.S. without authorization, which contradicts federal law and policy to remove such incentives.”

On July 7, 2011, TIGTA published yet another audit report revealing that President Obama’s economic stimulus law had made the ACTC more generous and that the IRS had paid out $4.2 billion to illegal aliens through this refundable credit in 2010. The title of this audit report: "Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits."

In July 2012, TIGTA published a report on an audit it had initiated because two IRS employees had alleged “that IRS management was requiring employees to assign Individual Taxpayer Identification Numbers (ITIN) even when the applications were fraudulent.”

In this report, TIGTA revealed that in 2011 the IRS had sent $46,378,040 in tax refunds to what theoretically were 23,994 unauthorized aliens using ITINs and all sharing a single Atlanta, Ga., mailing address. Similarly, the IRS sent $10,395,874 in refunds to what theoretically were 2,507 unauthorized aliens using ITINs and all sharing a single address in Oxnard, California.

The same IG report said the IRS also sent $7,319,518 in refunds to 2,706 theoretical unauthorized aliens who all shared the same bank account.

The IG found that the IRS sometimes granted massive numbers of ITINs to unauthorized aliens who all used the same address. For example, according the IG, the IRS assigned 15,795 ITINs to theoretical unauthorized aliens all using the same address in Phoenix. It also assigned 15,028 ITINs to theoretical unauthorized aliens all using the same address in Dallas.

It has now been seventeen years since the IRS decided it should start issuing ITINs to illegal aliens—or, as the IG put it, made a “policy decision” to “legalize illegal aliens.”

Immigration and Customs Enforcement Spokesman Brandon Montgomery told CNSNews.com that SSA and the IRS still do not provide ICE with information about no-match W-2s or ITIN tax filings.

Since June 24, CNSNews.com has made multiple inquiries to the IRS asking whether at any time since TIGTA issued its 1999 audit report on the service’s ITIN policy had the IRS begun giving federal immigration enforcement agencies information about known or suspected illegal aliens who had applied for ITINs, or filed tax returns using ITINs, or about employers who had filed hundreds of no-match W-2s in a single year. The IRS has not yet responded.

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