IRS loophole for illegals’ children costs taxpayers billions

Michael Bastasch | Energy Editor

A two-part News 13 WTHR Indianapolis report uncovered a tax loophole involving undocumented workers that costs taxpayers over $4.2 billion a year. What’s worse is that the IRS has known about the problem for years.

Russell George, the U.S. Department of Treasury’s Inspector General for Tax Administration said that the IRS has known about the problem for years and that “the magnitude of the problem has grown exponentially.”

Undocumented workers have been taking advantage of a loophole called the Additional Child Tax Credit, a fully-refundable credit of up to $1,000 per child that was intended to help working families with children living at home. Not only are they claiming children within the U.S., they are also claiming children in Mexico.

How does this happen? All Americans, whether legal or illegal, who earn income are required by law to file taxes, but doing so requires having a social security number which illegal immigrants aren’t supposed to have. The IRS remedied this by created the individual taxpayer identification number. This well-intentioned remedy has backfired, however, and is costing taxpayers billions of dollars a year.

The inspector general George has repeatedly warned the IRS about these abuses, releasing a report last July showing that the problem had ballooned to $4.2 billion per year.

“Keep in mind, we’re talking $4 billion per year,” George told WTHR. “It’s very troubling.”

The IRS has yet to take any actions to correct the loophole despite the inspector general’s warnings.

“Millions of people are seeking this tax credit who, we believe, are not entitled to it,” he said. “We have made recommendations to [IRS] as to how they could address this, and they have not taken sufficient action in our view to solve the problem.”

The whistleblower, a tax preparer who brought the case to the attention of WTHR, said he has thousands of examples of illegal immigrants claiming credits for children residing in Mexico, including children labeled as nieces and nephews on their filings.

“We’ve seen sometimes 10 or 12 dependents, most times nieces and nephews, on these tax forms,” the whistleblower said. “The more you put on there, the more you get back.”

He also got no response from the IRS when he tried to report completely fraudulent returns using fake income and documents.

“These were fraudulent, 100 percent fraudulent tax returns, but I got no response; absolutely none. We never heard a thing,” the whistleblower told WTHR. “To me, it’s clear the IRS is letting this happen.”

WTHR also interviewed undocumented workers who told them how easy it was to take advantage of the credit. One worker interviewed said his address was used by four other documented workers who don’t even live there. The four claimed 20 children and got tax returns totaling $29,608. Only one little girl was observed at the residence, the twenty other children live in Mexico and have never even visited the U.S.

“They don’t live here,” said the undocumented worker. “The other kids are in their country of origin, which is Mexico.”

The IRS issued a statement on the story.

“The law has been clear for over a decade that eligibility for these credits does not depend on work authorization status or the type of taxpayer identification number used,” the statement reads. “Any suggestion that the IRS shouldn’t be paying out these credits under current law to ITIN holders is simply incorrect. The IRS administers the law impartially and applies it as it is written.”

The WTHR investigation has brought increased scrutiny on the IRS by Congress. Indiana Republican Rep. Dan Burton has co-sponsored a bill that would only make the additional child tax credits available for U.S. citizens.

“We’ve got to deal with it,” Burton said. “I knew this was a problem, but until hearing what you found, I didn’t know it was this severe.”

The bill has sat idle in the House Ways and Means Committee for almost a year, but the language from the bill is now included in proposed budget savings measures that lawmakers are expected to consider in May.

The budget package, including the tax credits adjustment, is expected to die in the Democratic-controlled Senate.

A few Democrats have, however, come out in support of the Burton bill. Democratic Sen. Claire McCaskill sent a letter to IRS Commissioner Douglas Shulman saying, “stopping unauthorized voters can and must happen immediately.”

“This should not be a partisan issue because we’re all concerned about saving taxpayer dollars and not wasting them on fraudulent things like this,” Burton said.

Despite lawmakers’ outrage, many immigrants do not want their benefits to disappear.

“It’s not taking advantage. I’m very thankful to this country for the help it gives me,” said one illegal immigrant in central Indiana.

“Who’s going to help them if they’re not eligible … to avoid them ending up in the drug mafia, begging in the street, being raped? What happens when they get sick?” he continued.

Taking away the ability of illegal immigrants to obtain tax credits could hurt their children living in the U.S. The children are citizens if they are born in the U.S., but would be unable to receive tax credits under the proposed bill in Congress.

But systemic abuse is a concern that the inspector general and Congressional Republicans find most troubling.

“It’s being abused by people who are not entitled to use it, and that’s problematic,” George said.

“It’s cheating the American taxpayer,” Burton agreed. “We all believe in humanity and humanitarianism, but we’ve got a $15 trillion national debt. We can’t subsidize the whole world.”

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