Tax Loophole:Illegal Immigrants Get Fraudulent Tax Refunds Cost Treasury Billions

As federal services from air-traffic control to White House tours are ratcheted down thanks to the budget sequestration, millions of illegal aliens are now eagerly await billions in illegitimate Treasury payments, courtesy of the Internal Revenue Service (IRS).

Two programs, the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) provide cash payments to low-income parents who pay no income tax and fail to have a valid Social Security number.

The IRS makes it easy. The tax collection agency routinely issues an Individual Taxpayer Identification Number (ITIN) to individuals who file income-tax returns but are not eligible to work in the United States. A few go to foreign investors who pay federal income taxes on their U.S. holdings. They are not the problem.

Most ITINs are issued to illegal immigrants living in the country. Many do not work. Many more do not even have children. They file federal income-tax returns often with the help of tax-filing services solely to receive a child tax-credit refund.

The IRS knowingly allows illegal aliens who claim children to get Earned Income Tax Credit cash payments of up to $5,891 per household. This is one reason why these cash payments are expected to exceed $52 billion in fiscal year 2012 alone. The General Accountability Office (GAO) estimates that roughly a quarter of all Earned Income Tax Credit payments are issued improperly.
Compounding the problem is the Additional Child Tax Credit, which was added to the older Child

Tax Credit program that became law in 1997. The Child Tax Credit reduces the tax low-income
families pay by $1,000 for each child under 17. If the tax filer claims five children for a credit of $5,000 but owes only $2,000 in taxes, under the Additional Child Tax Credit the IRS sends the filer a check for the difference, or $3,000.

Compounding the problem is the Additional Child Tax Credit, which was added to the older Child Tax Credit program that became law in 1997. The Child Tax Credit reduces the tax low-income families pay by $1,000 for each child under 17. If the tax filer claims five children for a credit of $5,000 but owes only $2,000 in taxes, under the Additional Child Tax Credit the IRSsends the filer a check for the difference, or $3,000.

The federal tax agency makes no effort to verify the existence of children or the eligibility of the tax-credit recipients to work in the United States. Indeed, IRS managers reportedly encourage their staff to ignore questionable applications and blatant fraud for the sake of fast-tracking Individual Taxpayer Identification Number approvals.

A 2011 Treasury Department study found the IRS paid illegal immigrants $4.2 billion in Additional Child Tax Credit refunds in 2010, representing nearly one-fifth of all ACTC refunds paid that year.

These cash payments are one more incentive for illegal immigrants to enter, reside and work in the United States. That is the last thing we need in an economy in which 10 million U.S. citizens and more than 1 million legal immigrants are looking for work.

The scandal prompted at least one congressman to act. Last year, Rep. Sam Johnson, Texas Republican, introduced the ITIN Reform Act. The legislation would require people claiming Additional Child Tax Credit refunds on tax returns filed without a Social Security number to verify their citizenship status in person at an IRS office. Currently, the IRS sends these refunds automatically, with no questions asked.

Thus far, the IRS has refused to implement reforms that could stop massive ACTC fraud by illegal immigrants. Senate Majority Leader Harry Reid, Nevada Democrat, blocked an effort to bring the Child Tax Credit Integrity Preservation Act (S. 577) to the floor, ensuring that illegal immigrants can continue to get billions in cash payments for children who may not even exist.

Eliminating these illegitimate payments could save at least $4.2 billion to fund other government activities.

This is a tiny fraction of total federal spending, but if properly used, it could make a big difference. Shifting this amount from Additional Child Tax Credit fraud to aggressively pursuing higher value IRS targets such as high-income and corporate tax cheats could put a real dent in the “tax gap” the difference between what the government collects each year and what it is owed. Right now, that gap is close to $400 billion, no small thing when the government is projected to incur an $850 billion deficit this year.

At the very least, we could reopen the White House to public tours and keep more air-traffic controllers on the job with the money. We know that unless Congress pulls the plug on the Additional Child Tax Credit, the IRS will continue sending taxpayer funds to millions of lawbreakers who have no legal right to be in the United States.

Edwin S. Rubenstein is president of ESR Research and was formerly chief economist for the Grace Commission on Waste in Government.

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