The Internal Revenue Service’s Individual Taxpayer Identification Number Creates Significant Challenges for Tax Administration

 

January 2004

 

Reference Number:  2004-30-023

 

 

This report remains the property of the Treasury Inspector General for Tax Administration (TIGTA) and may not be disseminated beyond the Internal Revenue Service without the permission of the TIGTA.

Redaction Legend:

2d = Law Enforcement Technique(s)
2e = Law Enforcement Procedure(s)

January 8, 2004

 

 

MEMORANDUM FOR DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT

 

FROM:     Gordon C. Milbourn III /s/ Gordon C. Milbourn III

                 Acting Deputy Inspector General for Audit

 

SUBJECT:    Final Audit Report - The Internal Revenue Service’s Individual Taxpayer Identification Number Creates Significant Challenges for Tax Administration  (Audit # 200230050)

 

This report presents the results of our analysis of United States (U.S.) Individual Income Tax Returns (Form 1040) filed with an Internal Revenue Service (IRS) Individual Taxpayer Identification Number (ITIN) by resident aliens for Tax Year (TY) 2001 and, where applicable, TY 2000.  This evaluation included identifying attributes of these Forms 1040, such as income, deductions, credits and refunds, and the related tax administration issues that affect compliance with tax laws and regulations.

Forms 1040 filed with ITINs represent significant challenges for tax administration and affect other areas of Federal Government concern and tax policy.  An analysis of the tax return attributes for TY 2001 resident aliens who were not authorized to work in the U.S. showed that approximately 530,000 Forms 1040 were filed with ITINs as the primary number.

These returns reported adjusted gross income (AGI) of $10.7 billion, which was reduced by $7.5 billion for the standard and itemized deductions and exemptions.  The amount of taxes due was $495 million.

The taxes due were reduced by tax credits and payments, leaving a reported total tax liability of $184 million.  This tax liability represented 1.7 percent of the $10.7 billion in AGI.  After the tax liability was computed, the claimed amount of refunds totaled $522 million.

In all likelihood, the number of Forms 1040 with ITINs will increase.  The approximately 530,000 returns is a 99 percent increase in the number of Form 1040 returns filed with an ITIN over a 3-year period.  Moreover, the number of ITINs issued to resident aliens, their spouses, and dependents increased from approximately 693,000 in Calendar Year (CY) 2001 to 925,000 in CY 2002.

Forms 1040 filed with an ITIN represent two major challenges for tax administration.  First, unauthorized resident aliens with questionable identification benefit ****2(d), 2(e)****  In TY 2000, 353,000 tax returns included an estimated 309,000 paper filed returns with 2 different identification numbers:  an ITIN on the Form 1040 and a Social Security Number (SSN) on 1 or more of the attached Wage and Tax Statements (Form W-2).  ****2(d), 2(e)****  These returns raise concerns about identity theft, perjury, and fraud.  Second, unauthorized resident aliens benefit ****2(d), 2(e)****  For TY 2000, we estimated that 82,000 unauthorized resident aliens (1 in 4 return filers) did not report income from wages and nonemployee compensation of $324 million, an average of almost $4,000 per return.

Other Federal Government agencies and tax policy issues also are affected by ITIN usage because unauthorized resident aliens benefit from the tax law that generally prohibits disclosing tax return information.  First, the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 provided that information concerning immigration status should be reported to the Bureau of Immigration and Customs Enforcement (BICE).  In our opinion, the IRS is able to identify some unauthorized resident aliens by using ITIN records.  However, the tax law generally prohibits the IRS from sharing this tax return information with other Federal Government agencies.  Thus, there is a conflict between the tax law and immigration law.

The second area of Federal Government concern is identity theft through misuse of the SSN.  Federal Government agencies have reported that hundreds of thousands of unauthorized resident aliens have used fraudulent documents to obtain employment.  We found unauthorized resident aliens had used approximately 265,000 SSNs that the Social Security Administration (SSA) had assigned to other individuals.  Under current law, the IRS is prohibited from sharing this information with the SSA.

From a tax policy perspective, unauthorized resident aliens benefit from the tax law since they are treated virtually the same as U.S. citizens and lawful resident aliens.  An unauthorized resident alien is entitled to the same deductions and credits, except for the Earned Income Tax Credit (EITC).  Therefore, unauthorized resident aliens are eligible for the Additional Child Tax Credit (ACTC), which is one of only two major credits that can result in a Federal Government payment above the tax liability.  In TY 2001, $160.5 million was given to approximately 203,000 unauthorized resident aliens, with about 190,000 of these filers having no tax liability and receiving $151 million.

Like the ACTC, the EITC was available to unauthorized resident aliens when it became law in 1975.  In 1996, the law was changed in part to deny the EITC to unauthorized workers.  A legislative purpose of the ACTC is similar to the purpose of the EITC.  Prior to the EITC law change, the General Accounting Office reported that awarding the EITC to illegal aliens was at cross-purposes with Federal Government policies that prohibit illegal aliens from working in the U.S.  Similar to the purpose of the EITC, the Senate stated that tax law changes to the Child Tax Credit (CTC) and ACTC were intended for “low income working families to promote work.”

Furthermore, while unauthorized resident aliens are treated virtually the same as U.S. citizens and legal resident aliens, they are not taxed like aliens who do not reside in the U.S. but have U.S. source income.  If the unauthorized resident aliens were taxed the same as nonresident aliens, they could not take the standard deduction.  Unauthorized resident aliens claimed the standard deduction on 92.3 percent of the returns filed, reducing their AGI by $3.2 billion.  Also, if unauthorized resident aliens were taxed the same as nonresident aliens, they could not claim the lower tax rate associated with the head of household filing status.  Unauthorized resident aliens claimed this status on about 160,000 (30.2 percent) of the approximately 530,000 tax returns filed during TY 2001.

Finally, unauthorized resident aliens using an ITIN as their identification number prepared over 6,700 tax returns for U.S. citizens.  The IRS’ reliance on unauthorized resident aliens for tax return preparation may have an adverse impact on public confidence and satisfaction with the tax system.

On July 8, 2003, we issued a memorandum to the IRS (see Appendix VIII) that stated unauthorized resident aliens would be eligible for the accelerated CTC and ACTC disbursements under the newly passed and proposed legislation.  We estimated that these disbursements could be $150 million.  We recommended that the IRS Commissioner advise the Department of the Treasury concerning the potential conflict with immigration law, delay sending the disbursements until questionable identifications could be resolved, and propose legislation to limit the ACTC, similar to the EITC, for unauthorized resident aliens.  The IRS provided a reasoned response to the memorandum (see Appendix IX).  The Department of the Treasury was advised of our concern about the credits and the process of considering legislation to limit the ACTC was initiated.  The IRS stated that it was not authorized to delay the disbursements because unauthorized resident aliens are entitled to the credit by the current law.

The IRS recognizes the need to address the ITIN tax administration challenges.  The IRS chartered an ITIN Task Force, accepted most of its recommendations, and established an ITIN Project Office that is implementing the accepted recommendations.  In addition, the IRS established an ITIN position in the National Taxpayer Advocate (NTA) Service and is initiating procedures to assist taxpayers who might have been victims of identity theft.

We recommended that the Commissioner, Wage and Investment (W&I) Division issue instructions to ****2(d), 2(e)**** that have questionable identification issues, ****2(d), 2(e)**** (Recommendations 1 and 2), and communicate this problem to persons providing assistance with return preparation and filing (Recommendations 3, 4, and 5).  ****2(d), 2(e)**** the Commissioner, W&I Division, should ****2(d), 2(e)**** unreported income and improve assistance to victims of identity theft (Recommendations 6, 7, and 8).  The Deputy Commissioner for Services and Enforcement should determine whether any actions are warranted against persons preparing or assisting with the preparation of tax returns with questionable identification (Recommendations 9 and 13), coordinate with the Bureau of Citizenship and Immigration Services (BCIS) and the SSA to assess the benefits to these agencies of seeking legislation to broaden the IRS’ authority to share information (Recommendation 10), seek legislation to generally require persons who are compensated for assisting with preparing or filing tax returns be a U.S. citizen or a resident alien authorized to work in the U.S. (Recommendation 11), and define and tax unauthorized resident aliens more like nonresident aliens (Recommendation 12).

Management’s Response:  IRS management expressed agreement with 5 of the 13 recommendations.  They agreed with Recommendation 5 and will work with software developers to modify computer programs used by Electronic Return Preparers (ERP).  They also agreed with Recommendation 8 and will explore using Federal Trade Commission data to reduce the tax administration effects of identity theft.  In addition, management agreed with Recommendations 10, 11, and 12 by initiating the process through which the legislative proposals would be considered.  These proposals included broadening the use of IRS data by other Federal agencies, preventing unauthorized resident aliens from working in the tax return preparation industry, and changing the taxation of income reported by unauthorized resident aliens.  Management provided corrective actions for each of these issues.  Moreover, management is taking additional actions on ITIN issues not included in the scope of the review, such as the changes recently announced for the ITIN application process.

Management partially agreed with Recommendations 3 and 4 involving tax return preparation assistance provided by paid preparers, ERPs, and volunteer groups.  Management is taking corrective action on Recommendation 3 and already has programs that address Recommendation 4.  However, management indicated that paid preparers and volunteers are not required to verify the identification information provided by a taxpayer.

Management expressed disagreement with six recommendations.  They did not agree with Recommendations 1 and 2 ****2(d), 2(e)****  Management advised that they have seen no evidence that ITIN holders are more or less accurate in calculating their tax liabilities than any other taxpayer group.  Management also advised that the economic and noneconomic costs (e.g., taxpayer burden) of implementing a new policy would outweigh the potential benefits to tax administration.

Management did not agree at this time with Recommendations 6 and 7, ****2(d), 2(e)**** to address underreported income and identity theft.  Management advised that implementing this system was currently not feasible ****2(d), 2(e)****and that a cost-benefit analysis would be needed.  Management also advised that they would continue to study whether the system might become feasible in the future.

Also, management disagreed with Recommendations 9 and 13.  These recommendations concerned the suitability of administrative or legal actions involving tax preparation situations, such as individuals who prepare or assist with preparing or filing tax returns with questionable identification and paid preparers identifying themselves with ITINs.  However, management followed the intent of the recommendations by receiving IRS Office of Chief Counsel’s advice.  Its Chief Counsel indicated that no actions were warranted.

Recommendations 1, 2, 6, 7, 10, and 12 included outcome measures.  Since management did not agree with Recommendations 1, 2, 6 and 7, they did not agree with the outcome measures associated with them.  Furthermore, management stated that it was not appropriate to comment on the outcome measures for Recommendations 10 and 12 involving tax policy.

Management’s complete response to the draft report is included as Appendix X.

Office of Audit Comment:  Management’s corrective action for Recommendation 10 was to initiate the process through which the legislative proposals would be considered by sharing our report with the Assistant Secretary for Tax Policy at the Department of the Treasury and other Federal agencies.  We encourage the IRS to further its coordination, and take a more proactive role by offering to these agencies in-depth guidance on the type of information the IRS receives, its privacy concerns, and the potential impact of legislation on tax administration.  This approach could assist Federal agencies in determining whether legislation would help them achieve their missions, understanding the IRS’ interests, and, therefore, deciding whether to coordinate with the Assistant Secretary.

Management’s corrective action for Recommendation 11 was to initiate the process for considering this legislative proposal by sharing our report with the Assistant Secretary for Tax Policy and the NTA.  However, management did not specifically address the recommendation for the IRS to supplement the NTA’s existing proposal for legislation regulating paid preparers.

Likewise, management’s corrective action for Recommendation 12 was to initiate the legislative process by sharing our report with the Assistant Secretary for Tax Policy.  However, we are unclear whether the IRS agrees or disagrees from a tax administration viewpoint since the IRS did not address these tax administration issues to the extent permitted by its policy on providing comments on legislation.

It appears that the basis of the IRS’ disagreement with a part of Recommendations 3 and 4 was that paid preparers or volunteers should not verify taxpayer identification information.  However, we made no recommendation to take this action.  The intent of these recommendations was not to have a verification performed but simply to have two different identification numbers identified.  We believe these actions are unrelated.  As a result, this issue remains a concern.

We are unclear concerning management’s rationale for not implementing Recommendations 1 and 2, ****2(d), 2(e)****  The intent of the recommendations was not to question the ability to correctly calculate tax ****2(d), 2(e)****, but rather to establish the identity of the filer.  The recommendations for paper filed and electronically filed returns follow the IRS’ current application of the Internal Revenue Code provision ****2(d), 2(e)****  The recommendation for paper filed returns follows the methodology currently used on ****2(d), 2(e)****  Consequently, the recommendations do not constitute a new policy.  By not taking action, the IRS will continue to hold U.S. citizens and resident aliens authorized to work in the U.S. to a different standard than that to which unauthorized resident aliens are held.

Similarly, different standards will continue to be applied because management disagreed at this time with Recommendations 6 and 7 regarding unreported income and identity theft.  However, while management’s interest in the future feasibility of these recommendations appears to be a corrective action, they did not identify the responsible officials, set completion dates, or describe how any actions taken would be monitored.  We believe acting on underreported income is particularly important when the percentage of people in America who think that it is acceptable to cheat on their Federal income tax increased from 11 to 17 percent from 1999 to 2003.  In our opinion, the benefits of providing equal treatment to all taxpayers and of enabling assistance to as many as 265,000 potential victims of identity theft would outweigh the relatively modest processing cost of an estimated $435,000.

Management disagreed with Recommendations 9 and 13.  However, management’s response showed that they followed our intent by receiving the Office of Chief Counsel’s advice.  While the response for Recommendation 9 addressed penalties against tax return preparers, it did not address sanctions against ERPs, as described in the report.  Furthermore, the basis of management’s response appears to be similar to their basis for Recommendations 3 and 4, which addressed verification of identification information.  As we noted, our interest was in detecting the use of two different identification numbers.  Consequently, we cannot be certain that management fully addressed this issue and, as a result, it remains a concern.

Management’s response to Recommendation 13 indicated that resident aliens who are not authorized to work in the U.S. are permitted to use ITINs to meet the IRS’ identification requirement for individuals who work, within the tax system, as paid preparers.  Furthermore, this issue aligns with the Federal Government’s focus on citizenship issues:  unauthorized resident aliens have access to sensitive identification and financial information from potentially unsuspecting U.S. citizens.  In our opinion, these factors provide management with knowledge of an employment issue that is inseparable from tax administration because of its potential impact on the public’s confidence in the tax system.  So, while no laws may have been violated, we believe that the risk of continuing this practice outweighs its benefit to tax administration.

While we still believe our recommendations are worthwhile, we do not intend to elevate our disagreement concerning them to the Department of the Treasury for resolution.

Due to the nature of some material in this report, we have placed on the public Treasury Inspector General for Tax Administration (TIGTA) Internet web site a redacted version of the report.  If you identify a need to release this report to anyone outside of the IRS, please refer them to the redacted version on the TIGTA Internet web site.

Copies of this report are also being sent to the IRS managers who are affected by the report recommendations.  Please contact me at (202) 622-6510 if you have questions or Philip Shropshire, Acting Assistant Inspector General for Audit (Small Business and Corporate Programs), at (215) 516-2341.

Table of Contents

Background

Attributes of Forms 1040 Filed by Resident Aliens

Forms 1040 Filed With an Individual Taxpayer Identification Number Represent a Challenge for Tax Administration

Recommendations 1 and 2:

Recommendation 3:

Recommendation 4:

Recommendations 5 through 7:

Recommendation 8:

Recommendation 9:

Other Federal Government Agencies and Tax Policy Are Affected by Individual Taxpayer Identification Number Usage

Recommendation 10:

Recommendations 11 and 12:

Recommendation 13:

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Outcome Measures

Appendix V – Attributes of Forms 1040 Filed With an Individual Taxpayer Identification Number in Tax Years 2000 and 2001

Appendix VI – Credits Claimed on Forms 1040 Filed With an Individual Taxpayer Identification Number in Tax Years 1998-2001

Appendix VII – Explanation of the Term “Unauthorized Resident Alien”

Appendix VIII – Memorandum:  Accelerating Scheduled Increases in the Child Tax Credit and the Additional Child Tax Credit to Unauthorized Resident Aliens Should Be Reconsidered

Appendix IX – Management’s Response to Memorandum

Appendix X – Management’s Response to the Draft Report

 

Background

To efficiently and effectively process tax returns, the Internal Revenue Service (IRS) uses Taxpayer Identification Numbers (TIN).  The TIN is a required entry on tax returns to facilitate tax administration.  For individuals, the required TIN is the Social Security Number (SSN).

The Internal Revenue Code (I.R.C.) also provides that any person required to file a return, statement, or other document shall include an identifying number for securing proper identification of that person.  The SSN shall be used as the identifying number for such individual for this purpose, except as otherwise specified under regulations.  A United States (U.S.) Individual Income Tax Return (Form 1040) is the primary tax return filed by individuals.

In general, the Social Security Administration (SSA) limits its assignment of SSNs to individuals who are U.S. citizens and alien individuals legally admitted to the U.S. for permanent residence or under other immigration categories authorizing U.S. employment.  Consequently, individuals who do not meet these criteria cannot obtain SSNs.

In past years, alien individuals who could not obtain SSNs, and who had income that was taxable by the U.S., would file tax returns without identifying numbers.  To help these taxpayers comply with the identification requirements of the I.R.C., Treasury Regulations were issued in 1996 to provide for an Internal Revenue Service (IRS) Individual Taxpayer Identification Number (ITIN).  The purpose of the ITIN was to provide alien individuals, whether or not they reside in the U.S., an identifying number for use in connection with U.S. tax return filing requirements. 

Also, the Treasury Regulation provides that the IRS assign ITINs to resident aliens who cannot obtain an SSN.  The ITIN is intended for tax purposes only and creates no inference regarding an alien individual’s right to be legally employed in the U.S. and that individual’s immigration status (i.e., the ITIN does not authorize a foreign individual to work or live in the U.S.).

This audit serves as an in-depth analysis of data that were developed in response to a request for information from the Honorable Charles E. Grassley, then Ranking Member of the Senate’s Committee on Finance.  The request concerned the IRS programs for identifying illegal aliens and for sharing this information with the Bureau of Immigration and Customs Enforcement (BICE) and the SSA.  This audit also serves as a follow-up to our previous report on ITINs.

We performed our audit work between October 2002 and March 2003 at the Headquarters of the Wage and Investment (W&I) Division in Atlanta, Georgia; the Headquarters of the Small Business/Self-Employed (SB/SE) Division in New Carrollton, Maryland; and the IRS National Headquarters in Washington, D.C.  The audit was performed in accordance with Government Auditing Standards.

Detailed information on our audit objective, scope, and methodology is presented in Appendix I.  Major contributors to the report are listed in Appendix II.

Attributes of Forms 1040 Filed by Resident Aliens

We performed extensive analysis of Forms 1040 that had an ITIN as the identifying number to provide decision makers and stakeholders with information.  This evaluation included identifying attributes of these Forms 1040, such as income, deductions, credits and refunds, and the related tax administration issues that affect compliance with tax laws and regulations.

To perform the analysis, we reviewed tax return documents based on a statistical sample for Tax Year (TY) 2000.  We then projected the sample results.  From our sample analysis, we observed three attributes of the ITIN tax returns filed on a Form 1040.  Numbers have been rounded for presentation purposes.

First, the ITIN does not authorize an individual to work in the U.S., yet the presence of the Wage and Tax Statement (Form W-2) in the filer’s name indicates wages from employment.  For TY 2000, we determined that approximately 353,000 Forms 1040 with an ITIN were filed by resident aliens who were not authorized to work in the U.S., yet the tax returns showed wages.  The analysis also showed that 278,000 of these filers received refunds of $262 million.

Second, we estimate that the 353,000 returns included 309,000 paper filed returns with 265,000 SSNs that the SSA did not assign to the individual who used it as the identification number on the Form W-2.  These returns also included an estimated 89,000 SSNs that the SSA never issued.  We concluded that these resident aliens used incorrect SSNs because, most likely, they could not legally obtain an SSN.  Therefore, these resident aliens were apparently employed without authorization.

Finally, unauthorized resident aliens did not report on their TY 2000 Forms 1040 income from wages and nonemployee compensation of an estimated $324 million.  These filers represent almost one of every four individuals who filed a Form 1040 with an ITIN.

For TY 2001, we computer analyzed the IRS tax return information for the resident aliens filing 530,000 Forms 1040.  These tax returns:

·        Reported adjusted gross income (AGI) of $10.7 billion, which was reduced by $7.5 billion for deductions.  These deductions included the standard deduction, itemized deductions, and exemptions for the filers, the filers’ spouses, and their dependents.

·        Claimed tax due before credits of $495 million and then reduced tax due with credits of $149 million.  The credits included the Child Tax Credit (CTC), Dependent Care Credit, Education Credit, Foreign Tax Credit, and Credit for the Elderly.

·        Claimed refunds of $522 million.

·        Reported no tax liability on 285,000 (54 percent) of the 530,000 tax returns filed.

·        Received Federal Government payments totaling $160.5 million for the Additional Child Tax Credit (ACTC), $151 million of which was paid to 190,000 individuals who had no tax liability.  In addition, $1.5 million was paid for the Earned Income Tax Credit (EITC).

·        After all deductions and credits, reported a total tax liability of $184 million, or 1.7 percent of the $10.7 billion in AGI.

We identified an estimated 84,000 electronically filed returns reporting wages and having ITINs on both Forms 1040 and W-2.  However, since the ITIN cannot be used for work purposes, it is unlikely that the employer provided a Form W-2 with the ITIN as the identifying number.

In all likelihood, the number of Forms 1040 with ITINs will increase.  Resident aliens filing Forms 1040 identified with an ITIN have increased from approximately 266,000 in TY 1999 to approximately 530,000 in TY 2001, as shown in Figure 1.

Figure 1:  Income Tax Returns Filed by Resident Aliens and Nonresident Aliens

Figure 1 was removed due to its size.  To see Figure 1, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

In fact, the number of Forms 1040 with an ITIN processed for TY 2001 represents a 99 percent increase over a 3-year period.  During these same years, the number of all Forms 1040 processed increased by only 2.8 percent.

This rapid growth will continue if the number of recently issued ITINs can be used as an indication of future filing trends.  As shown in Figure 2, resident aliens account for a significant majority of individuals to whom ITINs were issued.  The IRS issued almost 6 million ITINs to resident and nonresident aliens in Calendar Years (CY) 1996 through 2002.  Resident aliens accounted for 60 percent, and nonresident aliens accounted for a little over 33 percent of the ITINs issued.

Figure 2:  ITINs Assigned by the IRS

 

Figure 2 was removed due to its size.  To see Figure 2, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

Moreover, the number of ITINs issued to resident aliens, their spouses, and dependents increased from 693,000 in CY 2001 to 925,000 in CY 2002, a 1-year increase of 33 percent.  The IRS Commissioner stated that the IRS Taxpayer Assistance Centers (TAC) in the Western and Southwestern parts of the U.S. help between 100 and 150 noncitizens seeking ITINs per day.

Forms 1040 Filed With an Individual Taxpayer Identification Number Represent a Challenge for Tax Administration

Forms 1040 filed with ITINs represent a challenge for tax administration.  Two tax administration concerns arose from these returns:

·        Unauthorized resident aliens with questionable identification benefit ****2(d), 2(e)****

·        Unauthorized resident aliens, who did not report in TY 2000 an estimated $324 million in income, would benefit ****2(d), 2(e)****

Unauthorized resident aliens with questionable identification benefit ****2(d), 2(e)**** 

****2(d), 2(e)**** even though they filed Forms 1040 with incorrect or altered identification information on their Forms W-2.  Persons preparing tax returns for compensation (paid preparers) and, occasionally, IRS employees and federally funded volunteers supported by the IRS, assisted with 81 percent of these returns in TY 2000 and 75 percent in TY 2001.  The situation is different for paper filed and electronically filed returns.

Paper filed Forms 1040

****2(d), 2(e)****  This situation occurs when Forms 1040 are identified with an ITIN, but one or more of the attached Forms W-2 is identified with an SSN.  We estimate ****2(d), 2(e)**** 309,000 TY 2000 Forms 1040 with questionable identification.

****2(d), 2(e)****

****2(d), 2(e)**** the IRS ITIN Task Force recommended in September 2002 that an automated system be developed ****2(d), 2(e)****  However, the IRS did not take this action pending further study of the issue.

In August 2002, the IRS Commissioner advised the Department of the Treasury that ****2(d), 2(e)****  The IRS did not take action because it believed there would be a significant cost to developing and implementing the required procedures.

****2(d), 2(e)****

Potential violations of tax statutes and the identity theft statute****2(d), 2(e)**** there is concern whether potential violations of tax laws may have been committed which affect tax administration.  In general, the tax law provides that the tax return information be true.

There are three provisions concerning the information on the tax return.  First, the I.R.C. states, “that any return, declaration, statement, or other document required to be made under any provision of the internal revenue laws or regulations shall contain or be verified by a written declaration that it is made under the penalties of perjury.”  Individuals convicted of perjury may be subject to fines and imprisonment.

Second, the I.R.C. states that, “any person who willfully aids or assists in the preparation or presentation of a return, which is fraudulent or is false as to any material matter shall be guilty of a felony and subject to fines and imprisonment.” 

Finally, “any person who willfully delivers or discloses to the Secretary any list, return, account, statement, or other document, known by him to be fraudulent or to be false as to any material matter shall be guilty of a felony, and subject to fines and imprisonment.”

In the case of the ITIN returns, there is further concern whether there were potential violations of the identity theft statute.  We estimate that the 309,000 TY 2000 Forms 1040 included 265,000 SSNs that did not belong to the individuals who filed the tax returns or to their spouses.  Seventy-nine percent of these 309,000 tax returns received a refund.  The SSA had assigned these SSNs to other individuals.  This indicates the possibility that the SSNs were fraudulently used.

The Identity Theft and Assumption Deterrence Act of 1998 provides that a criminal offense is committed if an individual knowingly uses, without lawful authority, a means of identification of another individual with the intent to commit any unlawful activity that constitutes a violation of Federal law.  This would include using another individual’s personal identifying information, such as an SSN, and providing that SSN to obtain a tax refund.

The IRS Criminal Investigation (CI) function is authorized to investigate the submission of potential fraudulent or false documents in connection with a return and fraudulent claims for a refund.  The CI function can also investigate potential identity theft when one of these tax violations is already present.  The facts and circumstances of the potential tax and identity theft violations, as they pertain to Forms 1040 identified with an ITIN, may not fall within the guidelines for initiating an investigation.

Assisting the victims of identity theft – Law enforcement officials have characterized identity theft as the fastest growing type of crime in the U.S.  Identity theft headed the Federal Trade Commission’s (FTC) list of the top 10 consumer fraud complaints for 2001 and 2002.  The FTC stated that, in CY 2001, approximately 1,700 victims reported “fraudulent claims for tax returns in their name.”  In CY 2002, almost 3,100 victims reported tax return-related fraud.  Some of these instances may have involved Federal tax.

When the use of a false SSN results in the IRS making an unwarranted contact with a taxpayer, the IRS Commissioner stated, “Not only will the innocent taxpayer undergo the burden of resolving this issue with the IRS, their social security earnings and FICA withholding must be corrected.”  The IRS is addressing the victims of identity theft through its National Taxpayer Advocate (NTA) Service and initiating procedures to assist taxpayers in response to reports of identity theft.

We recognize these efforts.  However, the IRS does not take advantage of all available methods to reduce the consequences of identity theft that might affect taxpayers.  When it processes Forms 1040, the IRS does not  ****2(d), 2(e)****  Nor has the IRS determined whether the FTC’s data could be used to assist taxpayers.

Electronically filed Forms 1040

****2(d), 2(e)**** the IRS has a method to identify electronically filed Forms 1040 with two different identification numbers.  ****2(d), 2(e)****  However, this process is ineffective for two reasons.

First, ****2(d), 2(e)****

The IRS no longer assists taxpayers with this type of ****2(d), 2(e)**** return.  Instead, the IRS employees were instructed to direct taxpayers to a volunteer program for assistance with ****2(d), 2(e)****  In effect, the IRS transferred to volunteer organizations any risk of providing return preparation assistance ****2(d), 2(e)****

Second, ****2(d), 2(e)**** electronically filed tax returns on which the Form W-2 identification number was apparently changed from the number appearing on the original Form W-2.  The IRS processed an estimated 84,000 TY 2001 Forms 1040 filed with an ITIN that reported wages and refunded $121 million; it rejected only 119 of these returns.

In all likelihood, the Form W-2 identification numbers were changed between the time the Forms W-2 were issued by the employer and the time the tax returns were electronically filed with the IRS.  As a result, using ITINs on Forms W-2 submitted with electronically filed tax returns may raise concerns over potential violations of tax statutes similar to concerns that may arise when two different identification numbers are used on paper filed tax returns.

****2(d), 2(e)****

Why Form W-2 identification is changedNot surprisingly, electronic filers usually were assisted by IRS-authorized Electronic Return Providers (ERP) and, on occasion, by the IRS’ own employees and volunteers, as shown in Table 1.

Table 1:  Electronic Filing Assistance Provided on TY 2001 Forms 1040 With an ITIN

Table 1 was removed due to its size.  To see Table 1, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

These Forms W-2 were filed with incorrect identification numbers for several reasons.  The IRS advised the ERPs not to alter Form W-2 information and to confirm the identity and identification number of the taxpayer.  The IRS also indicated that it would not accept a tax return for electronic processing when the identification number on Form W-2 does not match the identification number on Form 1040.  However, to file electronically, the Form W-2 identification number must be changed or the IRS will not accept the return for processing.

In addition, IRS employees and volunteers did not follow instructions to prepare only paper returns.  The IRS stated that preparing electronic tax returns would involve changing the identification number on the Form W-2.

Computer programs used by the ERPs may automatically change the Form W-2 number.  We tested four computer programs used to prepare electronic tax returns, including one used by IRS employees and volunteers.  The preparer enters the identification number under which the Form 1040 will be filed.  This identification number is automatically updated to the Form W-2 information.  So, when an ITIN is used for the Form 1040, the computer program will automatically insert the ITIN as the Form W-2 identification number.

Similar to paper filed returns, taxpayers and preparers may be subject to perjury and fraud statutes when information is changed.  In addition, the ERPs may be subject to income tax return preparer penalties.  These penalties can be considered when an ERP makes changes to a tax return, other than a transposition error, misplaced entry, spelling error, or arithmetic correction.  The IRS can also sanction an ERP for violating the requirements of the electronic filing program.  These sanctions include a written reprimand, suspension, or expulsion from the program, depending upon the seriousness of the infraction.

We expect this issue to become more prominent in the future.  The IRS electronically processed over 86,700 TY 2001 Forms 1040 with an ITIN, almost doubling the estimated 44,000 electronic returns with ITINs processed in TY 2000.  The IRS Restructuring and Reform Act of 1998 (RRA 98) established a goal that 80 percent of all tax returns should be filed electronically by 2007.

Unauthorized resident aliens who did not report in TY 2000 an estimated $324 million in income benefit ****2(d), 2(e)****

****2(d), 2(e)****  For TY 2000, we estimate that 82,000 returns filed by unauthorized resident aliens did not report income from wages and nonemployee compensation of $324 million, an average of almost $4,000 per tax return.

These 82,000 underreporters represent 23 percent of all unauthorized resident aliens who filed tax returns. Therefore, almost one of every four filers did not report all their income as required by law.  Over one-half of these underreporters claimed no tax liability on their tax returns.

One of the IRS’ strategic goals is to provide service to all taxpayers by increasing the fairness of compliance and increasing overall compliance.  To help achieve this goal, the IRS identifies unreported income through its Automated Underreporter (AUR) document matching program and by examining tax returns.  However, neither method is fully effective for finding and taxing income not reported by unauthorized resident aliens.

****2(d), 2(e)****

****2(d), 2(e)****

The IRS can also identify unreported income through examinations.  However, of the 353,000 TY 2000 Forms 1040 filed with an ITIN and reporting wages, ****2(d), 2(e)****  Examinations of returns submitted by these filers may become even less frequent because the IRS is redirecting its resources to higher-income taxpayers. 

The IRS recognizes the need to address the ITIN tax administration challenges.  The IRS chartered an ITIN Task Force, accepted most of its recommendations, and established an ITIN Project Office that is implementing the accepted recommendations.  In addition, the IRS established an ITIN position in the NTA Service and is initiating procedures to assist taxpayers who might have been victims of identity theft.  Our recommendations to supplement these actions follow.

Recommendations 

The Commissioner, W&I Division, should:

1.      Identify paper filed Forms 1040 with an ITIN having a related Form W-2 with an SSN, ****2(d), 2(e)****

2.      Identify electronically filed tax returns where both the Form 1040 and related electronic Form W-2 are filed with an ITIN, ****2(d), 2(e)****  Since the IRS’ electronic control already rejects tax returns when identification numbers do not match, no electronically filed return with an ITIN should be accepted.

Management’s Response:  Management did not agree that ****2(d), 2(e)**** would improve tax administration.  ****2(d), 2(e)****  Management has seen no evidence that ITIN holders are more or less accurate in calculating their tax liabilities than any other taxpayer group.  ****2(d), 2(e)****

****2(d), 2(e)****

Office of Audit Comment:  We are unclear concerning the IRS’ rationale for not implementing these recommendations.  The intent was not to question the ability to correctly calculate tax ****2(d), 2(e)****, but rather to establish the identity of the filer.  The recommendations for paper filed and electronically filed returns follow the IRS’ current application of the I.R.C. provision ****2(d), 2(e)**** and the recommendation for paper filed returns follows the methodology currently used on ****2(d), 2(e)****  Consequently, the recommendations do not constitute a new policy.  In fact, the IRS Commissioner advised the Chairman of the U.S. Senate Committee on Finance that the IRS routinely uses its authority ****2(d), 2(e)****  In FY 2000, the IRS used this authority over 1.2 million times ****2(d), 2(e)****  Therefore, the issue is not a matter of accurately calculating tax liability but rather the consistency of the identification numbers on the tax returns, schedules, or statements.

We disagree with the decision ****2(d), 2(e)**** electronic returns for ITIN filers when the Forms W-2 show ITINs.  As a result, ****2(d), 2(e)**** even though the Form W-2 identification numbers were probably changed between the time they were issued by the employer and the time the returns were filed.

By not taking action on paper filed and electronically filed returns, the IRS will continue to hold U.S. citizens and resident aliens authorized to work in the U.S. to a different standard than that to which unauthorized resident aliens are held.

Additionally, management’s response seems to address an overall ITIN filer tax compliance issue that these recommendations do not address, but which is addressed by Recommendation 6.  While management states ****2(d), 2(e)**** with underreporting tax liability, the report shows that one in four of these TY 2000 filers had underreported their income.

3.      Conduct outreach to advise paid preparers and ERPs that the ITIN is not a legal identification number for employment and that their customers may be using fraudulent or erroneous SSNs on Forms W-2.  In addition, they should be advised that the electronic Form W-2 information must show the identification number that appears on the Form W-2 as issued by the employer.

Management’s Response:  Management agreed, in part, with this recommendation.  The Office of Taxpayer Education and Communication, SB/SE Division, will conduct outreach and provide advice to paid preparers and ERPs through the SB/SE Division Payroll and Practitioner’s Forum, the IRS Stakeholder Headliners, and the IRS e-News for Tax Practitioners.  The Director, Electronic Tax Administration, will conduct outreach to alert paid preparers and ERPs to the allowable use and application of ITINs and the importance of not altering Form W-2 information.  However, management stated that paid preparers and ERPs are not required to verify the identification information provided by a taxpayer.

Office of Audit Comment:  The intent of the recommendation is not to verify identification information, but simply to identify two inconsistent identification numbers used on Forms 1040 and Forms W-2.  We believe the issue of verifying identification information is separate from the issue of identifying two different identification numbers.  We made no recommendation concerning this issue and did not include it in the scope of the audit. 

4.      Ensure that IRS employees and volunteer programs do not assist with the preparation or filing of tax returns with questionable identification. 

Management’s Response:  Management agreed with this recommendation to the extent that IRS programs already address it.  Training was provided to volunteers regarding identification verification, and the existing training advises volunteers to refuse return preparation if there are concerns regarding the validity of documents.  The IRS Field Assistance sites stopped preparing returns with mismatched TINs during the 2003 Filing Season.  However, management stated that return preparers are not required to verify identification information provided by a taxpayer.

Office of Audit Comment:  Similar to our comments for Recommendation 3, the purpose of this recommendation is not to put volunteers in the position of performing identification information verification.  As we reported, the IRS does not permit its own employees to assist with these returns.  ****2(d), 2(e)****  The fact that there are two different identification numbers should preclude the volunteers from assisting in return preparation, just as it precludes IRS employees from assisting in return preparation.

5.      Advise developers of electronic filing computer programs to modify these programs to prevent the automatic update of Form W-2 identification information when an ITIN is used on Form 1040.

Management’s Response:  The IRS will work with the software developers to ensure that their e-file programs validate that the information populated on the Form 1040 agrees with the information contained on the Form W-2.  This will prevent the automatic update of Forms W-2 when an ITIN is used on Form 1040.

****2(d), 2(e)**** the Commissioner, W&I Division, should:

6.      ****2(d), 2(e)**** unreported income from third-party records ****2(d), 2(e)****

7.      Identify potential victims of identity theft and minimize the possibility of unwarranted IRS contacts ****2(d), 2(e)****

Management’s Response:  Management did not agree with the recommendations at this time, stating that a cost-benefit analysis of implementing ****2(d), 2(e)**** would need to be undertaken.  ****2(d), 2(e)****  Management stated that while these actions are currently not feasible, they will continue to study whether the actions might become feasible in the future.

Office of Audit Comment:  While management’s interest in the future feasibility of these recommendations appears to be a corrective action, management did not identify the responsible officials, set completion dates, or describe how any actions taken would be monitored.  We determined that the corrective action would involve ****2(d), 2(e)**** an estimated 444,000 of the 89 million paper filed TY 2001 Forms 1040, or about one-half of 1 percent.  The processing cost would be approximately $435,000.  In FY 2003, the IRS had a budget approaching $10 billion.  By not ****2(d), 2(e)**** the IRS continues to hold U.S. citizens to a higher standard than that to which it holds unauthorized resident aliens.

As we stated in the report, one in four TY 2000 Forms 1040 filed with an ITIN by resident aliens had underreported income ****2(d), 2(e)****  In contrast, available statistics show that one in nine tax returns ****2(d), 2(e)**** for potentially discrepant income or deductions.  While these results may not be directly comparable to those in the report, the results suggest that the noncompliance rate of Forms 1040 with an ITIN could be higher than that for all Forms 1040.

Furthermore, we believe taking action is of heightened importance when the percentage of people in America who think that it is acceptable to cheat on their Federal income tax returns increased from 11 to 17 percent between 1999 and 2003.  In our opinion, providing equal treatment to all taxpayers and enabling the IRS to assist as many as 265,000 potential victims of identity theft would outweigh the costs.

8.      Determine whether the FTC’s data on identity theft can be used to assist taxpayers who might be victims of this violation.

Management’s Response:  The ITIN Program Office will contact the FTC to determine whether the data contained in its database can be used by the IRS to assist victims of identity theft.

The Deputy Commissioner for Services and Enforcement should:

9.      Determine whether any actions are warranted against taxpayers, ERPs, IRS employees, and volunteers who prepare or assist with preparing or filing of tax returns with questionable identification.

Management’s Response:  The IRS Office of Chief Counsel advised that a person who prepares or assists with the preparation or filing of a tax return is not subject to a preparer penalty merely because the taxpayer’s identification on the return is questionable.  The IRS stated that return preparers are not required to verify the identification information provided by a taxpayer, and the recognition of such questionable identification may be beyond their expertise.

Office of Audit Comment:  Management’s response showed that they followed the intent of the recommendation by obtaining the IRS Office of Chief Counsel’s advice.  However, while the response addressed penalties against tax return preparers, it did not address sanctions against ERPs, as described in the report.  Furthermore, the basis of management’s response appears to be similar to their basis for Recommendations 3 and 4, which addressed verification of identification information.  As we noted, our interest was in detecting the use of two different identification numbers.  Consequently, we cannot be certain that management fully addressed this issue.  Moreover, we believe that the preparer community could recognize the use of two inconsistent identification numbers if the IRS includes this information as part of its action on Recommendation 3.  As a result of these factors, this issue remains a concern.

Other Federal Government Agencies and Tax Policy Are Affected by Individual Taxpayer Identification Number Usage

Other Federal Government agencies and tax policy issues are affected by ITIN usage.  The two concerns that arose from the analysis of these returns are:

·        Other Federal Government agencies are affected because unauthorized resident aliens benefit from the tax law that generally prohibits the disclosure of tax information to other Federal Government agencies. 

·        From a tax policy perspective, unauthorized resident aliens benefit from the tax law when they are treated the same as U.S. citizens.

Other Federal Government agencies are affected because unauthorized resident aliens benefit from the tax law that generally prohibits the IRS from sharing with other Federal Government agencies tax return information submitted by taxpayers 

There are at least two Federal Government agencies that could benefit from the information that the IRS receives on Forms 1040 that use ITINs.  The IRS does not share this information with the other agencies. 

Available statistics indicate that unauthorized resident aliens are increasing in number, despite efforts to prevent unlawful entry.  The Bureau of Citizenship and Immigration Services (BCIS) estimated that the total unauthorized resident alien population had doubled in the past decade, from 3.5 million in 1990 to 7 million in 2000.  On average, this population grew by 350,000 annually.

The IRS does have information on some of the unauthorized resident aliens.  However, the tax law generally prohibits the IRS from sharing tax return information submitted by taxpayers with other Federal Government agencies unless there is a specific legislated exception.  Because the IRS is unable to share this information, it cannot assist with addressing unauthorized immigration or unauthorized work.  In turn, this creates the need to administer tax laws to an increasing number of unauthorized resident aliens.

The IRS cannot share information with the BICE

The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (IIRIRA) provided that information concerning immigration status should be reported to the BICE notwithstanding any other law.  The General Accounting Office (GAO) testified before the Congress that the BICE needed to coordinate with other Federal Government agencies to effectively implement its strategies for controlling illegal immigration.

In our opinion, the IRS is able to identify some unauthorized resident aliens by using its ITIN records but by law is unable to share this information with other Federal Government agencies.  The I.R.C. provides that this information is confidential, and it does not include a provision for disclosing this information.

In 1999, we first reported on the apparent conflict between immigration and tax laws.  We recommended that the ITIN program disclosure policy be brought into conformance with the immigration law.  The IRS advised us that the disclosure law would need to be changed to specifically permit the IRS to follow the IIRIRA.  While the disclosure law was amended, it provides only for certain disclosures involving terrorism.  Therefore, the IRS is unable to assist the BICE with information about potential unauthorized resident aliens.  In light of the events of September 11, 2001, and the importance of homeland security, the apparent conflict between immigration and tax law remains a concern.

Unauthorized resident aliens are preparing tax returns for U.S. citizens 

Paid preparers are required to show on the tax return their SSN or Preparer Tax Identification Number (PTIN).  An ITIN recipient is not authorized to obtain a PTIN.

For TY 2001, 290 ITINs were shown as the preparer’s identification number on 8,179 tax returns.  Of these returns, 6,747 (82 percent) were filed by taxpayers with SSNs who, therefore, likely were U.S. citizens or foreign individuals legally residing in the U.S.  Most of these tax returns were prepared by 42 individuals, as shown in Table 2.

Table 2:  Unauthorized Resident Aliens Prepared TY 2001 Forms 1040 for Taxpayers Filing with SSNs

Table 2 was removed due to its size.  To see Table 2, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

Consequently, unauthorized resident aliens would have access to sensitive data such as SSNs and financial records, which could be used inappropriately.  Yet, the IRS cannot share this information with other Federal Government agencies or the affected taxpayers.

The IRS NTA reported to the Congress that there are no national standards that a person is required to satisfy before presenting himself or herself as a Federal tax preparer and selling tax preparation services to the public.  To address this issue, the NTA recommended that the Congress enact a registration, examination, certification, and enforcement program for persons who prepare Federal tax returns.

Although there are no overall standards for the preparer industry, the IRS has standards for Electronic Returns Originators (ERO).  Each ERO’s responsible officials must be U.S. citizens or legal resident aliens and are subject to a screening process as a condition of approval of their application.  However, individuals who work for those EROs are not required to meet the same requirements.  Preparers with ITINs were affiliated with 15 businesses that were approved by the IRS as EROs.

The IRS relies on EROs to confirm identities and identification numbers shown on tax returns.  The IRS has stated that confirmation of identification numbers is “the cornerstone of any fraud prevention program.”  The IRS asks the EROs to look for suspicious or altered Forms W-2 and fraudulent returns where an individual uses someone else’s name or SSN.  The IRS’ reliance on unauthorized resident aliens to be watchdogs over fraud could cause the IRS embarrassment and may have an adverse impact on public confidence and satisfaction with the tax system.

The IRS cannot share information with the SSA  

The second area of Federal Government concern is with SSN identity theft.  Government agencies reported that hundreds of thousands of unauthorized resident aliens have used fraudulent documents, including Social Security cards, to obtain employment.  

The Inspector General of the SSA testified before the Congress that identity theft was already a significant problem facing law enforcement, the financial industry, and the American public before September 11, 2001.  The Inspector General stated that improperly obtained SSNs were a factor in the terrorists’ ability to assimilate themselves into American society while they planned their attacks.  The events of September 11, 2001, heightened the urgency for protecting the integrity of SSNs.

The Social Security Act provides that whoever, with the intent to deceive, falsely represents a number to be his or her SSN when, in fact, that number was not assigned to that person, shall be guilty of a felony and subject to a fine, imprisonment, or both.  This includes using a false SSN to obtain employment. 

The I.R.C. generally prohibits the IRS from disclosing this information to the SSA.  Consequently, the SSA would not be provided with the opportunity to initiate investigations based on the IRS information, and unauthorized resident aliens would not be affected by the consequences of potentially violating the Social Security statute.  Unauthorized resident aliens submitted to the IRS an estimated 309,000 paper filed tax returns with an estimated 354,000 SSNs on Forms W-2.  These Forms W-2 included 265,000 SSNs that are assigned by the SSA to other individuals.

As a possible indicator of a growing problem with identity theft, the FTC stated that, in CY 2001, approximately 7,800 victims reported that the identity thief used the victim’s personal information to obtain employment.  In CY 2002, approximately 15,000 victims reported employment-related fraud.

From a tax policy perspective, unauthorized resident aliens benefit from the tax law when they are treated the same as U.S. citizens 

The I.R.C. defines for tax purposes the terms nonresident alien and resident alien.  A nonresident alien is neither a citizen of the U.S. nor a resident of the U.S.  A resident alien is a resident of the U.S. for any calendar year if that individual was lawfully admitted for permanent residence.  A resident alien is also a foreign individual in the U.S. who meets the “substantial presence” test, which is based on the number of days that individual resides in the U.S.  Therefore, for tax purposes, an unauthorized alien residing in the U.S. is a resident alien. 

As a result, unauthorized resident aliens are taxed the same as U.S. citizens and lawful resident aliens.  An unauthorized resident alien is entitled to the same deductions and credits to reduce income tax, except for the EITC. 

So, the question becomes whether the taxation of unauthorized resident aliens should be more closely aligned to that of nonresident aliens.  Specifically, the ACTC provides a tax policy conflict since other Federal Government statutes prohibit treating unauthorized resident aliens the same as U.S. citizens and lawful resident aliens. 

The ACTC law provides for Federal Government payments to unauthorized resident aliens who had no income tax liability 

One of the credits that unauthorized resident aliens are entitled to is the ACTC.  Over 203,000 unauthorized resident aliens received $160.5 million in ACTC credits in TY 2001.  Of these filers, 190,000 had no tax liability and received $151 million in Federal Government payments for the ACTC.

The ACTC is one of only two major credits that can result in a Federal Government payment above the tax liability; the other credit is the EITC, which unauthorized resident aliens are prohibited from receiving.  Despite the difference in tax treatment, there are similarities between the ACTC and EITC. 

Like the ACTC, the EITC was available to unauthorized resident aliens when it became law in 1975.  Subsequently, the Congress and IRS expressed concerns about noncompliance with EITC requirements, including fraud.  The law was changed in 1996, in part to deny the EITC to unauthorized workers; the tax return must be identified by an SSN issued to an individual by the SSA for work purposes.

One of the legislative purposes for the ACTC is similar to the purpose for the EITC.  Prior to the EITC law change, the GAO reported that awarding the EITC to illegal aliens was at cross-purposes with Federal Government policies that prohibit illegal aliens from working in the U.S.  Similar to the purpose of EITC, the Senate stated that tax law changes to the CTC and ACTC were intended for “low income working families to promote work.”  Like the EITC, providing the ACTC to resident aliens who are not authorized to work is inconsistent with the immigration law that prohibits employing unauthorized resident aliens.

Moreover, we identified an early indication of a similar filing pattern between the ACTC and EITC.  Between 1975 and 1993, the maximum amount of the EITC increased from $200 to $2,364.  As the amount of the EITC increased:

·        The number of Internal Revenue Service Numbers (IRSN), the predecessor to the ITIN, increased significantly.  The IRS assigned approximately 1,800 IRSNs in 1975, which increased to 175,000 assigned in 1993.

·        The amount of the EITC claimed on returns assigned an IRSN increased from a projected $141,000 in 1986 to a projected $197 million in 1993.

Recent tax return filings show that the ACTC may be following a similar pattern.  The ACTC first became available in TY 1998.  Taxpayers needed three or more qualifying children to receive the credit.  In TY 2001, the number of qualifying children was changed to one or more.  While this reduction may have accounted for some of the increase in the ACTC, it may have also made obtaining an ITIN more appealing.

·        The IRS assigned 123,000 ITINs to resident aliens in CY 1998, the first year that the ACTC could be claimed.  This rose to 339,000 ITINs in CY 2001 and 538,000 in CY 2002.

·        In TY 2000, the last year that 3 children were required to claim the ACTC, over 62,000 ITIN filers received an estimated $62 million in ACTC.  In TY 2001, when the number of qualifying children was reduced, 203,000 ITIN filers received $160.5 million in ACTC.

On July 8, 2003, we issued a memorandum to the IRS (see Appendix VIII) that stated unauthorized resident aliens would be eligible for both the accelerated CTC disbursements under the newly passed Jobs and Growth Tax Relief Reconciliation Act of 2003, and ACTC disbursements under the proposed Relief for Working Families Tax Act of 2003.  We estimated that the accelerated disbursements could be $150 million.

We recommended that the IRS Commissioner advise the Department of the Treasury about the apparent conflict with the immigration law, delay sending the accelerated disbursements until questionable identifications could be resolved, and propose legislation to place limitations on the ACTC, similar to the EITC, for unauthorized resident aliens.

In response to the memorandum, the IRS advised the Department of the Treasury of our concern about the credits and started the process of considering legislation to limit the ACTC.  The IRS stated that it was not authorized to delay the disbursements because unauthorized resident aliens are entitled to the credit by law.  The response is included as Appendix IX.

While virtually the same tax treatment is provided to all residents, the same treatment is not provided to all aliens

While unauthorized resident aliens are taxed like other residents, they are not taxed like aliens who do not reside in the U.S. but have U.S. source income.  Thus, as a matter of tax law, unauthorized resident aliens are treated virtually the same as U.S. citizens and lawful resident aliens.  Nonresident aliens cannot receive certain benefits from the tax law that would reduce their tax bills.  For example, for TY 2001:

·        Nonresident aliens cannot claim the standard deduction.  Instead, they must itemize deductions.  This may lower the amount of deductions from income and increase the tax liability.  In contrast, unauthorized resident aliens claimed the standard deduction in 489,000 (92.3 percent) of the 530,000 tax returns filed, decreasing reported AGI by $3.2 billion.

·        Nonresident aliens cannot claim the Education Credit.  In contrast, 10,000 unauthorized resident aliens claimed $7.4 million in credits to decrease their tax liabilities.

·        Unmarried nonresident aliens cannot claim the lower tax rate of the head of household filing status.  In contrast, resident aliens claimed this status in 160,000 (30.2 percent) of the 530,000 tax returns filed.

·        Nonresident aliens could not receive a rate reduction credit.  For TY 2001, unauthorized resident aliens received $53 million in advance payments for the rate reduction credit.  Those that did not receive an advance payment claimed $63 million in credits to reduce their tax liabilities when they filed their TY 2001 tax returns.

The Federal Government has recognized that unauthorized resident aliens are not always entitled to benefit from the same laws as U.S. citizens.  For example, the Social Security Act provides that they are not entitled to receive benefits from Old-Age, Survivors, and Disability Insurance benefits.

Similarly, the State of Wisconsin recognized that individuals who have not been granted immigrant status by the BCIS should be taxed differently from other state taxpayers.  Wisconsin requires that these individuals be taxed like nonresidents of Wisconsin.  Consequently, they are not eligible for the Working Families Tax Credit or the Homestead Credit.

When unauthorized resident aliens receive the ACTC like U.S. citizens and lawful resident aliens, the legislative purposes for assisting lawful working taxpayers may be compromised.  The current tax laws and policy are favoring individuals who already may not have complied with immigration, Social Security, and identity theft laws. 

Recommendations

The Deputy Commissioner for Services and Enforcement should: 

10.  Coordinate with the BCIS and the SSA to assess the benefits to these agencies of seeking legislation to broaden the IRS’ authority to share information with them regarding unauthorized resident aliens and seek legislation as warranted. 

Management’s Response:  Management’s overall response to the content of the report stated, “Despite the distinctly undesirable behaviors actually or potentially associated with ITINs, the Service remains legally responsible for enforcement of the nation’s Federal tax laws with respect to ITIN holders…” and that it has “statutory responsibilities and limitations to which the Service is subject that prevent or limit the Service from taking actions that might be desirable as matters of public policy.”

Management’s specific response to the recommendation stated that if the BCIS and SSA can demonstrate a need for the IRS’ information that clearly outweighs taxpayer privacy interests and concerns about the effect such sharing has on tax administration, they should coordinate with the Office of the Assistant Secretary for Tax Policy at the Department of the Treasury to seek a legislative proposal to change I.R.C. § 6103.  Management indicated they will share a copy of this report with the Office of the Assistant Secretary for Tax Policy, the BCIS, and the SSA. 

Office of Audit Comment:  While management recognized that there are “distinctly undesirable behaviors actually or potentially associated with ITINs,” it has limited its coordination to sharing the report with the Assistant Secretary for Tax Policy and other Federal agencies.  We encourage the IRS to take a more proactive role with these agencies by providing more in-depth guidance on the type of information the IRS receives, its privacy concerns, and the potential impact of legislation on tax administration.  This approach could assist Federal agencies in determining whether legislation would help them achieve their missions, understanding the IRS’ interests, and, therefore, deciding whether to coordinate with the Assistant Secretary for Tax Policy.  In addition, although not included in our recommendation, we also encourage the IRS to share a copy of the report with the BICE.

11.  Supplement the NTA’s recommendation for a certification program for tax preparers by proposing that, in general, (1) preparers must be U.S. citizens or resident aliens authorized to work in the U.S. and (2) individuals who assist with electronically filed tax returns for U.S. residents, and who are affiliated with an ERO, must be U.S. citizens or resident aliens authorized to work in the U.S.

Management’s Response:  A copy of this report will be shared with the NTA and the Office of the Assistant Secretary for Tax Policy, which is responsible for proposing legislative changes. 

Office of Audit Comment:  We are unclear from the response whether the IRS plans to supplement the NTA’s recommendation for a certification program for tax preparers.  While the IRS will share a copy of the report with the NTA and the Office of the Assistant Secretary for Tax Policy, management did not specifically address the recommendation for the IRS to supplement the NTA’s existing proposal for legislation regulating paid preparers.

12.  Seek legislation to define and tax individuals who file tax returns reporting income from employment, but who are not authorized to be employed in the U.S., more like nonresident aliens.

Management’s Response:  A copy of this report will be shared with the Office of the Assistant Secretary for Tax Policy, which is responsible for proposing legislative changes. 

Office of Audit Comment:  We are unclear whether the IRS agrees or disagrees from a tax administration viewpoint since the IRS did not address these tax administration issues to the extent permitted by its policy on providing comments on legislation.

13.  Determine whether tax return preparers who use ITINs as identification have violated any laws that the IRS is authorized to investigate and, if so, determine whether these violations warrant any action.

Management’s Response:  The IRS Office of Chief Counsel has indicated that inasmuch as the IRS requires a paid return preparer to furnish an identifying number, the tax return preparers who are not eligible for an SSN are not in violation of 26 U.S.C. § 6109(a)(4) or any revenue laws if they enter their ITIN.  An individual who is not eligible for an SSN generally is expected to use an ITIN whenever such person is required to furnish an identifying number for tax administration purposes. 

Office of Audit Comment:  Management’s response indicated that resident aliens who are not authorized to work in the U.S. are permitted to use ITINs to meet the IRS’ identification requirement for individuals who work, within the tax system, as paid preparers.  Furthermore, this issue aligns with the Federal Government’s focus on citizenship issues:  unauthorized resident aliens have access to sensitive identification and financial information from potentially unsuspecting U.S. citizens.

In our opinion, these factors provide management with knowledge of an employment issue that is inseparable from tax administration because of its potential impact on the public’s confidence in the tax system.  So, while no laws may have been violated, we believe that the risk of continuing this practice outweighs its benefit to tax administration.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

Our overall objective was to analyze United States (U.S.) Individual Income Tax Returns (Form 1040) filed with an Internal Revenue Service (IRS) Individual Taxpayer Identification Number (ITIN) by resident aliens for Tax Year (TY) 2001 and, where applicable, TY 2000.  This evaluation included identifying attributes of these Forms 1040, such as income, deductions, credits and refunds, and the related tax administration issues that affect compliance with tax laws and regulations.  To accomplish the objective, we:

I.                    Determined the filing attributes for Forms 1040.

A.                 Obtained a statistically valid sample of Forms 1040 for TY 2000 for review.

1.                  Identified from the Returns Transaction File (RTF) Forms 1040 meeting our criteria:  filed for TY 2000, identified by an ITIN as the primary identification number, and filed by a resident alien.

2.                  Selected from the universe of 353,373 tax returns a statistically valid sample of 353 tax returns for review using a confidence level of 95 percent, a precision level of +/- 2.5 percent, and an expected rate of occurrence not less than 95 percent.  We obtained guidance on our sampling methodology from the IRS Office of Statistics of Income.

3.                  Obtained the original Forms 1040 and information from the IRS Master File and Integrated Data Retrieval System.

B.                 Quantified selected data from the TY 2000 tax returns involving identification numbers, dependents, income, deductions, credits, and refunds.

1.                  Determined whether the identification numbers reported on the Forms 1040 and the attached Wage and Tax Statements (Form W-2) were both assigned to the same individual.  We researched the IRS’ records provided by the Social Security Administration to determine the identity of the individual for both identification numbers. 

2.                  Determined who prepared the Forms 1040.

3.                  Identified potential unreported income by reviewing records from the IRS Information Returns Program (IRP) and comparing this information to the tax return submitted by the taxpayer.

4.                  Evaluated refunds by determining the amount of Rate Reduction Credit received in advance for TY 2001.

C.                 Obtained an extract from the RTF for TY 2001 for Forms 1040 identified by an ITIN as the primary identification number and filed by a resident alien.  We analyzed the data contained on the RTF, which included credits, deductions, income, and return preparation.

D.                 Determined the number of electronically filed TY 2001 Forms 1040 identified with an ITIN and reporting wages that were (1) processed by the IRS and (2) rejected by the IRS because the Taxpayer Identification Number (TIN) on the Form 1040 did not match the TIN on the Form(s) W-2.  We analyzed data from the IRS Electronic Tax Administration Research and Analysis System.

E.                  Evaluated the frequency of the examination of the filers’ books and records by reviewing records from the IRS Audit Information Management System (AIMS).

II.                  Compared the Form 1040 to the U.S. Nonresident Alien Income Tax Return (Form 1040NR) to identify differences in benefits such as credits and deductions.

III.               Analyzed the IRS ITIN Application Database for 1996 through 2002 to determine if each applicant was a resident or nonresident alien.

 

Appendix II

 

Major Contributors to This Report

 

Philip Shropshire, Acting Assistant Inspector General for Audit (Small Business and Corporate Programs)

Edmond Watt, Audit Manager

Carole Connolly, Senior Auditor

Donna Saranchak, Senior Auditor

Lisa Stoy, Senior Auditor

Robert Weiss, Senior Auditor

Ronald Stuckey, Computer Specialist

 

Appendix III

 

Report Distribution List

 

Commissioner  C

Office of the Commissioner – Attn:  Chief of Staff  C

Commissioner, Large and Mid-Size Business Division  SE:LM

Commissioner, Small Business/Self-Employed Division  SE:S

Commissioner, Wage and Investment Division  SE:W

Chief, Criminal Investigation  CI

Director, Compliance, Wage and Investment Division  SE:W:CP

Director, Customer Assistance, Relationships, and Education, Wage and Investment Division  SE:W:CAR

Director, Electronic Tax Administration  OS:CIO:I:ET

Director, Taxpayer Education and Communication, Small Business/Self-Employed Division  SE:S:T

Director, Communications and Liaison, Small Business/Self-Employed Division  SE:S:M:CL

Director, Stakeholder Partnerships, Education, and Communication, Wage and Investment Division  SE:W:CAR:SPEC

Director, Submission Processing, Wage and Investment Division  SE:W:CAS:SP

Chief Counsel  CC

National Taxpayer Advocate  TA

Director, Office of Legislative Affairs  CL:LA

Director, Office of Program Evaluation and Risk Analysis  RAS:O

Office of Management Controls  OS:CFO:AR:M

Audit Liaisons:

Commissioner, Large and Mid-Size Business Division  SE:LM
Commissioner, Small Business/Self-Employed Division  SE:S

Commissioner, Wage and Investment Division  SE:W

 

Appendix IV

 

Outcome Measures

 

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration.  We have separated the outcome measures at risk based on Tax Administration and Tax Policy issues.  These benefits will be incorporated into our Semiannual Report to the Congress. 

We obtained guidance on our sampling methodology and projections from the Internal Revenue Service (IRS) Office of Statistics of Income.  Unless otherwise annotated, all computations are based on a 5-year period, computed as follows:  Year 1 = estimates and actual data for Tax Year (TY) 2000, and Years 2 through 5 = actual data for TY 2001 which was used to compute the outcomes for this 4-year period.

Type and Value of Outcome Measure: 

Tax Administration Issues

·        Revenue Protection – Potential; approximately 530,000 unauthorized resident aliens received approximately $2.4 billion in refunds ****2(d), 2(e)**** (see page 3).

[TY 2000 $262 million x 1 year] + [TY 2001 $522 million x 4 years] = $2.4 billion

·        Increased Revenue – Potential; approximately 82,000 unauthorized resident aliens did not report income of $324 million from all sources.  Using an effective tax rate of 1.7 percent, the tax effect would be approximately $27.5 million (see page 7).

[TY 2000 $324 million x 1.7 percent in tax due = $5.5 million] x 5 years = $27.5 million

·        Cost Savings (Funds Put to Better Use) – Potential; unauthorized resident aliens working in the United States (U.S.) without authorization received the refundable Earned Income Tax Credit of approximately $7.3 million (see page 3).

[TY 2000 $1.2 million x 1 year] + [TY 2001 $1.52 million x 4 years] = $7.3 million

·        Taxpayer Burden – Potential; over 265,000 taxpayers may have been the victims of identity theft by unauthorized resident aliens in TY 2000 (see page 7).

Tax Policy Issues

·        Revenue Protection – Potential; unauthorized resident aliens received an accelerated payment of the Child Tax Credit of approximately $150 million in TY 2003 (see page 23).

·        Revenue Protection – Potential; unauthorized resident aliens claimed the standard deduction of $3.2 billion.  Using an effective tax rate of 1.7 percent, there would be a tax effect of $272 million (see page 23).

[TY 2001 $3.2 billion x 1.7 percent in tax due = $54.4 million] x 5 years = $272 million

·        Revenue Protection – Potential; unauthorized resident aliens received the Child Tax Credit of $597.3 million (see page 3).

[TY 2000 $90 million x 1 year] + [TY 2001 $126.83 million x 4 years] = $597.3 million

·        Revenue Protection – Potential; unauthorized resident aliens received the Education Credit of $33.5 million (see page 23).

[TY 2000 $4.1 million x 1 year] + [TY 2001 $7.35 million x 4 years] = $33.5 million

·        Revenue Protection – Potential; unauthorized resident aliens received the Credit for the Elderly of approximately $204,000 (see page 3).

[TY 2000 $32,000 x 1 year] + [TY 2001 $43,000 x 4 years] = $204,000

·        Cost Savings (Funds Put to Better Use) – Potential; unauthorized resident aliens working in the U.S. without authorization received the refundable Additional Child Tax Credit of approximately $704 million (see page 23).

[TY 2000 $62 million x 1 year] + [TY 2001 $160.53 million x 4 years] = $704.1 million

·        Taxpayer Privacy and Security – Potential; 8,200 returns and financial information were available to unauthorized resident aliens who prepared tax returns in TY 2001 (see page 23).

Methodology Used to Measure the Reported Benefits: 

We obtained tax return data from the TYs 2000 and 2001 IRS Returns Transaction Files (RTF).  In addition, we selected a statistically valid sample of 353 TY 2000 Forms 1040 filed with an Individual Taxpayer Identification Number (ITIN) as the primary identification number from a universe of 353,373 tax returns.  Our sample was selected using a confidence level of 95 percent, a precision level of +/- 2.5 percent, and an expected rate of occurrence not less than 95 percent.  We analyzed the attributes of the tax returns and the associated documents (i.e., Wage and Tax Statement [Form W-2]).  Our analysis included quantifying income, deductions, tax credits, refunds, etc.  We also obtained actual data for TY 2001 for returns filed by resident aliens with an ITIN.  In addition, we obtained information from the IRS Master File and Integrated Data Retrieval System.

 

Appendix V

 

Attributes of Forms 1040 Filed With an Individual Taxpayer Identification Number in Tax Years 2000 and 2001

The table in Appendix V was removed due to its size.  To see this table, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Appendix VI

 

Credits Claimed on Forms 1040 Filed With an Individual Taxpayer Identification Number in Tax Years 1998-2001

The table in Appendix VI was removed due to its size.  To see this table, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Appendix VII

 

Explanation of the Term “Unauthorized Resident Alien”

 

This audit report uses the term unauthorized resident alien based on the evidence we found during this and a prior analysis of the Internal Revenue Service (IRS) Individual Taxpayer Identification Number (ITIN) process.  Our conclusion is that, generally, the individuals who file a United States (U.S.) Individual Income Tax Return (Form 1040) with an ITIN as the identification number and receive wages that are identified with a Social Security Number (SSN) on the attached Wage and Tax Statements (Form W-2) are unauthorized resident aliens.  This conclusion is based on the following evidence and assumptions.  

Foreign individuals who received ITINs were residing in the U.S. without apparent authorization by the U.S. Department of Homeland Security (DHS)

The Treasury Regulation providing for the ITIN states that, “Any individual who is not eligible to obtain a social security number and is required to furnish a taxpayer identifying number must apply for an IRS individual taxpayer identification number on Form W-7, Application for IRS Individual Taxpayer Identification Number.…”  The Form W-7 states, “Do not submit this form if you have, or are eligible to obtain, a U.S. social security number (SSN).”  The Form W-7 requires the applicant to provide identity information and support his or her claim of foreign status (i.e., with passport or visa information).

During our prior audit of the ITIN process, we identified Forms W-7 that were approved by the IRS and showed applicants provided U.S. addresses and claimed to be U.S. resident aliens filing U.S. tax returns.  These Forms W-7 did not have passport information or U.S. visa information.  The absence of this information indicates the applicant may not have gained lawful entry into the U.S.  In fact, Forms W-7 had statements such as, “... NO LEGAL STATUS WITH INS” and “Entered without a visa” for an indefinite stay in the U.S.

In a related opinion, the IRS Office of the Assistant Commissioner (International) stated, “the Form W-7 is to be used only by individuals who are not eligible to obtain an SSN, and that citizens of the United States thus will not file a Form W-7.”  The IRS Office of Chief Counsel determined that, “the group of persons with United States federal tax obligations who are not eligible to obtain an SSN is limited to non-citizens who either do not reside in the United States or who reside here illegally.”

The DHS is responsible for citizenship, asylum, lawful permanent residency, employment authorization, refugee status, intercountry adoptions, replacement immigration documents, family and employment-related immigration, and foreign student authorization.  Foreign individuals who received ITINs and declared themselves as residing in the U.S. were apparently not authorized by the DHS to reside in the U.S.

Forms 1040 were filed by resident aliens

The Internal Revenue Code provides that an alien individual shall be treated for tax purposes as a resident of the U.S. with respect to any calendar year if such individual is a lawful permanent resident of the U.S. at any time during that calendar year, meets the substantial presence test, or makes a first-year election.  An individual is a nonresident alien if that individual is neither a citizen of the U.S. nor a resident of the U.S.

An individual who does not reside in the U.S., but who must report income, is required to file a U.S. Nonresident Alien Income Tax Return (Form 1040NR).  A resident alien individual is required to file a Form 1040.  All of the individuals included in our review filed Forms 1040 identified by ITINs.  By filing Forms 1040 with an ITIN, these individuals are declaring themselves as resident aliens rather than nonresident aliens.

Resident aliens were employed

The ITIN is intended for tax purposes only and creates no inference regarding an alien individual’s right to be legally employed in the U.S. (i.e., the ITIN does not authorize a foreign individual to work in the U.S.).  We estimate that $7.2 billion was claimed in wages and salaries in Tax Year (TY) 2000 on Forms 1040 identified by an ITIN.  In TY 2001, this amount increased to $10.2 billion.  The claimed wages and salaries indicated that these resident aliens were employed.

Resident aliens provided SSNs to their employers to obtain employment

The ITIN is not valid for work purposes.  So, employers are responsible for obtaining from new hires their names and SSNs from their Social Security cards.  Employers are also responsible for preparing Forms W-2 and submitting them to the Social Security Administration (SSA).  We estimate that the 309,000 TY 2000 Forms 1040 that resident aliens filed on paper had 354,000 SSNs on the attached Forms W-2, indicating that the resident aliens provided to their employers Social Security cards or SSNs for the purpose of obtaining employment.

Resident aliens would not have been able to obtain Social Security cards valid for employment in the U.S.

The SSA issues three types of Social Security cards.  The SSA issues Social Security cards to U.S. citizens or individuals lawfully admitted to the U.S. with permanent work authorization obtained from the DHS.  The second type of card has the legend, “Not Valid for Employment.”  The SSA issues this type of card to individuals from other countries lawfully admitted to the U.S. without work authorization from the DHS and who need a number because of a Federal Government law requiring an SSN to get a benefit or service.  The third type of card bears the legend, “Valid for Work only with [DHS] Authorization.”  The SSA issues these cards to individuals who are lawfully admitted to the U.S. on a temporary basis and with DHS authorization to work.  We concluded that the SSA should not issue a Social Security card (and therefore an SSN) to an individual who is not authorized by the DHS for admission into the U.S.

The Treasury Regulation states that, “Any individual who is duly assigned a social security number or who is entitled to a social security number will not be issued an IRS individual taxpayer identification number.”  Since the IRS assigns ITINs to resident aliens, we concluded that these resident aliens were not entitled to an SSN as assigned by the SSA when they applied for an ITIN.  We also concluded that if resident aliens were authorized by the DHS to reside in the U.S., and if that authorization permitted those individuals to work in the U.S., then those individuals would be eligible for a Social Security card valid for working purposes, and the IRS would not have assigned an ITIN.

Resident aliens obtained employment using false SSNs

The Social Security law states that, “whoever…with intent to deceive, falsely represents a number to be the social security account number assigned by the Commissioner of Social Security to him or to another person, when in fact such number is not the social security account number assigned by the Commissioner of Social Security to him or to such other person…shall be guilty of a felony….”  We estimate that all of the 354,000 SSNs on Forms W-2 submitted by resident aliens on the 309,000 TY 2000 paper filed Forms 1040 with an ITIN were assigned by the SSA to an individual other that the filer (265,000) or not assigned by the SSA (89,000).

Furthermore, a joint publication by the IRS and the SSA addresses the use of SSNs by individuals with ITINs.  The publication summarized an employer’s responsibilities for withholding and reporting of employment taxes on wages paid to “illegal aliens.”  Under the title “Illegal Use of Social Security Numbers (SSN),” the publication states that, “Since ITINs are for tax purposes only and are by no means a legal identification number for employment, individuals are utilizing erroneous or stolen SSNs when applying for employment.”

We concluded that the SSNs shown on the Forms W-2 had not been assigned to the resident aliens and were therefore false.  We further concluded that these false SSNs were used to obtain employment.  Additionally, we concluded that if the resident aliens were lawfully admitted to the U.S. and were lawfully permitted to work in the U.S., the resident aliens would have provided to their employers SSNs assigned to them by the SSA.

Audit Conclusion

The Forms 1040 included in our review were filed by resident aliens who were living in the U.S. without apparent authorization by the DHS.  Therefore, these individuals could not legally acquire Social Security cards that were valid for obtaining employment.  Since they could not acquire the necessary Social Security cards, the resident aliens needed, and probably provided to their employers, SSNs that had not been assigned to them by the SSA.  It is our opinion that individuals who are legally entitled to employment in the U.S. would also be legally entitled to obtain Social Security cards valid for employment.  Consequently, we concluded that the Forms 1040 included in our review were filed by unauthorized resident aliens:  foreign individuals who were working in the U.S. without authorization from the DHS and without a Social Security card valid for employment.

 

Appendix VIII

 

Memorandum:  Accelerating Scheduled Increases in the Child Tax Credit and the Additional Child Tax Credit to Unauthorized Resident Aliens Should Be Reconsidered

 

The memorandum was removed due to its size.  To see the memorandum, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Appendix IX

 

Management’s Response to Memorandum

 

The response to the memorandum was removed due to its size.  To see the response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Appendix X

 

Management’s Response to the Draft Report

 

The response was removed due to its size.  To see the response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.