Billions in Tax Refunds Siphoned by Illegals

by Darrin Mish, Tampa Tax Attorney

In a startling report, Indianapolis television station WTHR-TV exposes the scam where millions of illegal aliens obtain tax refunds from the IRS. In brief, these illegals claim child support for allegedly supporting family members in Mexico. But how does this happen?

Back in 1996, the Treasury department thought of a novel idea of getting illegals to pay income tax. After all, as long as they work and earn a living in the US, legally or otherwise, they should pay taxes. So the Treasury introduced a 9-digit identification number called the Individual Tax Identification Number (ITIN) to identify these illegals who cannot obtain a Social Security number because of their illegal status. At the same time, the ITIN was also a way for US employers to meet withholding requirements. In actual fact, this law was evidence that the government has failed to stem the influx of illegals from Mexico and crack down on the employers who employ them.

But despite the less than ideal situation with illegals, the law would have still served some good purpose except for one flaw. To obtain an ITIN, the applicant must submit original, official documents to the IRS office in Austin, Texas for processing. But instead of enforcing this requirement, the IRS has been allowing its other offices to process the documents simply to eliminate the risk of losing the documents in the mail. So now all the applicants need to do is attend an interview in an IRS office and produce their documents.

This alternative method reduces the stringency in vetting applications and increases the chances of obtaining an ITIN because the IRS maintains a fraud unit checking these applications only in their Austin office. The result is that the illegal workers can also easily obtain ITINs for family members like children, nieces and nephews.
What makes the entire scam work is the existence of another provision in the law, the Additional Child Tax Credit (ACTC) which is “a refundable credit that can be claimed by taxpayers who are ineligible to claim the full non-refundable child tax credit, because it exceeds their total tax liability.” The ACTC was aimed at reimbursing taxpayers for the non-refundable portion of their child tax credit.

But the ACTC has been abused by the illegals in various ways like claiming for dependents who are extended not direct family members and may not even be residing in the US. A reporter for WTHR-TV visited an illegal worker who made such a fraudulent claim. He admitted his home was being used by four other “undocumented workers” who do not live there. Combined they claimed child support amounting to $29,608 for 20 dependent children living inside one trailer home in Indiana. The man also admitted that the 20 children were living in Mexico and had never lived in the house.

The perpetrators of this scam are the Spanish-speaking tax preparers who instruct their clients on how to obtain a higher refund by increasing the number of dependents on their tax returns. This builds them a steady stream of clients and lots of return business.

According to the Treasury Inspector General for Tax Administration (TIGTA), “the magnitude of the problem has grown exponentially.” In 2005, $924 million of ACTC claims was paid out. But at present, the figure has risen to $4.2 billion per year. What exacerbated the problem was the tax cuts implemented during the Bush administration. Before 2001, to qualify for the ACTC one needed to have at least 3 dependent children and owe more Social Security taxes than earned income credits but since 2001, both these requirements have been scrapped.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Darrin Mish, Tampa Tax Attorney, The Law Offices of Darrin Mish, P.A. | Attorney Advertising

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Darrin Mish, Tampa Tax Attorney

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