As the battle on immigration reform heats up, more questions are being raised about the tax treatment of undocumented workers and others who might be illegally in this country. Of specific concern is the notion that undocumented workers might not be forced to be accountable for their tax obligations to date – especially while revelations of gross fraud are being made public.
Particularly disconcerting is the revelation that, in 2011, the Internal Revenue Service (IRS) inadvertently sent more than $46 million in tax refunds to “unauthorized” workers at a single Atlanta address. And that’s not the worst of it. In the tax year 2011, the IRS issued more than $86 million in tax refunds to ten addresses. The number of tax returns in question? Nearly 54,000 – to just ten addresses. Six of the ten addresses are located in the South, with four of those in Atlanta, Georgia.
In total, 154 different mailing addresses were identified as hotbeds of ITIN activity with each receiving more than 1,000 ITINs.
The information – and the problem – isn’t new; the details were made available in a report issued last year. You can read the initial report – from 2012 – which started the most recent conversations here (downloads as a pdf). It’s making news now, however, for two main reasons: the politics of the immigration reform and concern over IRS management processes.
The problem stems from fraudulent applications for Individual Taxpayer Identification Numbers (ITINs). ITINs are basically the equivalent of Social Security numbers for those taxpayers who are not eligible for a Social Security number. Criminals and undocumented workers have been able to improperly obtain ITINs and use them to request tax refunds since ITINs are used to file tax returns. In fact, the main purpose of ITINs was not for identification or obtaining credit cards or any such – but actually for filing and reporting requirements under the Tax Code. ITINs are issued regardless of immigration status because both resident and nonresident aliens may need to file. An ITIN does not offer proof of eligibility to work in the U.S. and it does not make taxpayers eligible for Social Security benefits or the Earned Income Tax Credit.
Despite the limitations, there are those who have been able to manipulate the system and improperly obtain ITINs. They then turn around and file bogus tax returns claiming refunds. Millions of dollars worth of refunds.
Thankfully, new controls were put in place as of January 2013. Those controls include new processes for obtaining ITINs, including the requirement that original documents be presented (ideally in person) as well as expiration dates for ITINs. Taxpayers wonder, however: will it be enough?
Despite the headlines making the rounds this week, the IRS is making progress on addressing and resolving ITIN fraud. A report issued by Treasury Inspector General for Tax Administration (TIGTA) last month found that the actions taken by IRS “are significantly improving the identification of questionable ITIN applications.” TIGTA identified nearly 115,000 more ITINs which were flagged as potentially fraudulent than the year before, proof, TIGTA concludes that IRS is doing a better job of identifying fraud.
The report noted that there is room for improvement. Repeat addresses were used in 2012 on multiple ITIN applications processed, but the numbers were down from those in 2011. The hotspot for fraud continued to be Atlanta, Georgia.
The results of that most recent data – and the report – were issued before the improved processes were implemented in 2013. Data for 2013 is not yet available (for obvious reasons).
