At issue is use of a tax break based on earned income called the additional child tax credit, which taxpayers can claim to reduce their taxes owed, sometimes gaining them a check from Uncle Sam if their tax obligation goes below zero.
Wage earners who are not authorized to work in the United States and lack Social Security numbers can use what IRS calls individual taxpayer identification numbers, which, data show, are associated with a higher proportion of fraudulent claims on tax returns. "The payment of federal funds through this tax benefit appears to provide an additional incentive for aliens to enter, reside and work in the United States without authorization, which contradicts federal law and policy," the report said.
Though undocumented workers are not eligible for federal benefits or the commonly claimed earned income tax credit, federal law is unclear, TIGTA said, on whether such workers who file tax returns qualify for refundable credits such as the additional child credit.
"Clarification is needed on this issue," said J. Russell George, Treasury inspector general for tax administration, saying IRS should work with the Treasury Department to clear up whether this child credit should be paid. The report also said the IRS should begin requiring those claiming the credit to document their eligibility.
IRS managers, in their response to a draft of the report, agreed to take up the issue with Treasury, but disagreed with TIGTA's recommendation on requiring documentation. The revenue agency has no legal authority to demand such documentation during the processing of a tax return, they said. The IRS can only do so during an individualized examination.
The murkiness of the issue reflects a long-standing broader dispute over who is responsible for enforcing immigration law. In the words of a former IRS commissioner quoted by TIGTA, "the IRS' 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."
How the agencies might handle the question divides advocacy groups in the larger immigration debate. Jonathan Blazer, staff attorney in the Oakland, Calif., office of the National Immigration Law Center, which defends many low-income immigrants, said, "Our tax system generally doesn't differentiate between citizens or immigrants or immigrants of differing immigration status, and no worker is given a free pass from the obligation to pay tax."
He thinks TIGTA is "one-sided in getting all up in arms because this credit is being claimed by one population." If one considers the context, Blazer said, undocumented immigrants contribute billions of dollars to the Social Security and Medicare trust funds, and even the IRS has documented the billions such workers contribute in overall taxes.
"If Treasury wants to reconsider promotion of tax compliance," he added, it should also consider "the consequences for all taxpayers, the major burden that citizenship inquiries would impose on taxpayers, tax preparers and the IRS."
Ira Mehlman, media director for the Federation for American Immigration Reform, which favors a crackdown on illegal immigration, offered a contrary view. "Treasury thinks IRS does have the authority" to fix the problem, but "IRS management doesn't want to exercise it," he said. "Setting aside fact that we're getting ripped off to the tune of $4.2 billion, there's a seeming lack of concern by agencies that are here to protect us."
Mehlman's group opposes refundable tax credits for workers who are in the country illegally, and he called it "astounding" that TIGTA audit data show 72 percent of tax returns using individual taxpayer identification numbers claimed the child tax credit. "Treasury should be able to call the IRS commissioner in" and tell him not to pay illegal immigrants refundable tax credits, "especially since we're running a deficit," Mehlman said. "If that doesn't work, that's what congressional oversight is for."