Tax Loophole: Billions of Dollars Paid to Undocumented Workers

Posted on: 9:18 pm, May 23, 2012, by , updated on: 10:51pm, May 23, 2012

A loophole in the tax law that allows illegal immigrants to claim certain tax credits is gaining nationwide scrutiny.  That’s because billions of dollars in tax refunds are being dished out to undocumented workers.  One woman says this very problem is happening right here in Alabama.

A Tennessee Valley woman, who is deeply embedded in the Hispanic community, contacted WHNT News 19 to blow the whistle on what she calls tax fraud. 

In an effort to protect her identity, we are addressing her as “Ruth.” To be clear, Ruth is a U.S. citizen.  She has been volunteering her time for years, helping out Hispanic families.  But this loophole, she says simply put, is wrong.

She tells WHNT, fifteen years ago she stumbled on a surprising situation while she was filing taxes for a couple. She found a couple filing tax returns separately and claiming multiple dependents.  Five in one case, who were living in Mexico.  Ruth says she called the IRS and the government agency admitted that what she had come across was perfectly legal. Flash forward to today, Ruth witnesses a similar situation. This time she was helping a local accountant with translating. 

 “To me, it’s stealing,” said Ruth. “That is the way it is.  You are taking something that does not belong to you.”

 U.S. citizens with multiple children were supposed to catch a break with an additional child tax credit of up to $1,000 per child.   But a recent Treasury Inspector General Report found illegal immigrants are taking that money and claiming several dependents at a time.  In some cases, Ruth says the dependents are people living in other countries.  “They can claim a father, a mother, nephew, cousin, brother or sister,” said Ruth.

 When filing your taxes, you usually need a Social Security number, but undocumented immigrants can still file with an ITIN, an Individual Tax Identification Number. There is an increasing amount of people using that to file for an additional child tax credit. And, in some cases, these refunds are like whopping savings accounts.

“They know they are going to get money,” Ruth explained. “They are not expecting $800 or $1,000. They are talking about $4,000, $5,000, $6,000 or $10,000 dollars!”

WHNT News 19 learned that this loophole is nothing new for the Treasury Inspector General for tax administration.  Every year, they inspect the tax system with a close eye by initiating audits.  Every year, they have examined ITIN cases.  Their most recent audit that examined the Additional Child Tax Credit (ACTC) was initiated to determine whether potentially noncompliance and fraudulent tax returns filed with ITINs were being properly and consistently worked. 

They found claims for the ACTC by ITIN filers have increased from $924 million in 2005 to $4.2 billion in Processing Year 2010. Their 2011 July report confirmed, legislation is needed to clarify whether or not refundable tax credits such as the ACTC may be paid to those who are not authorized to work in the United States.  They made that same plea in a 2009 report, and still the IRS has done nothing.

 The Internal Revenue Service issued WHNT News 19 this statement: 

“Eligibility for the Child Tax Credit and Additional Child Tax Credit does not depend on work authorization status or the type of taxpayer identification number used. Any suggestion that the IRS shouldn’t be paying these credits under current law to qualified individuals who hold ITINs is simply incorrect. 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. 

The IRS is very focused on preventing erroneous refund claims, and has procedures in place to evaluate questionable tax credit claims prior to issuance of a refund. The IRS has also introduced new requirements and higher standards on tax return preparers to ensure that they understand their obligations to assist taxpayers in preparing accurate returns.” 

 Senator Jeff Sessions (R-AL) is now stepping in, hoping to adopt legislation (S.577) that would close the loophole.  “Treasury’s Inspector General for Tax Administration has been abundantly clear,” said Senator Session. “These continuing payments are a misuse of taxpayer dollars and must be stopped.” 

 Ruth no longer does taxes for Hispanic families.  And she has this to say for those who she says are abusing the system. “As much as I love my community, things like that, I cannot tolerate.”