The Internal Revenue Service (IRS) made a policy decision to issue IRS Individual Taxpayer Identification Numbers (ITINs) to illegal aliens so tax filing obligations could be met. This IRS policy, to "legalize" illegal aliens, seems counter-productive to the Immigration and Naturalization Service (INS) mission to identify illegal aliens and prevent unlawful alien entry. The ITIN Program was designed to improve nonresident alien compliance with tax laws.

In 1994, the IRS conducted a study, based on the audit report entitled Review of Nonresident Alien Information Documents (Reference Number 041403, dated January 21, 1994), which showed significant compliance concerns with the $80 billion annual nonresident alien United States (U.S.) investment income. The ITIN Program permanently assigns a U.S. Tax Identification Number (TIN) to nonresident aliens. Information documents, showing individual taxpayers as recipients of dividends, interest, and other income, can then be matched to tax returns.

The IRS established ITIN regulations that require an alien person to provide sufficient documentation to prove both identity and foreign status. The ITIN Program, as implemented, ****2a,2b,2e****. We concluded that the majority of these persons were illegal aliens.

Illegal alien presence in the U.S. is a congressional concern. Legislation in the Welfare Reform Act and the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 requires:

• curtailing and/or eliminating welfare benefits.
• cooperating among federal, state and local governments on illegal alien identification.
• Increasing border patrols to prevent unlawful alien entry.

The ITIN Program adversely affects effective and efficient tax administration. Providing illegal aliens with valid TINs allows for certain tax advantages and increases the potential for fraud. Fraudulent or invalid dependent claims on tax returns provide additional tax deductions and access to certain tax credits. This will become an increasingly important factor with the addition of the child tax and education credits provided for in the Taxpayer Relief Act of 1997. The potential for fraud is further increased because of costly examination resources required to determine compliance. ****2a,2b,2e****.

The ITIN Program raises a range of concerns from tax policy to operational implementation.

Tax policy concerns include:

• conflict between the IRS’ disclosure policy, which does not provide for information sharing with the INS, and federal statutes requiring cooperation between federal agencies and the INS.
• Tax treatment of illegal aliens as residents, which allows tax benefits not available to nonresident aliens.

Operational concerns include:

• Management controls did not ensure effective implementation of the Internal Revenue Service’s ITIN Program.
• ****2a,2b,2e****.
• Ineffective returns processing controls for taxpayers affected by the ITIN Program requirement.

To address tax policy and operational issues, the IRS needs to request input from appropriate external authorities and take internal actions to determine whether:

• The ITIN Program disclosure policy is in conformance with current Immigration laws.
• The Privacy Act Notification should be included on the ITIN application form. The Privacy Act Notification provides the warning that information can be provided to the Department of Justice within the parameters of disclosure law.
• The Administration wants to continue affording illegal aliens tax treatment similar to legal resident aliens.
• The role of the Acceptance Agent in facilitating the application process should be re-examined.
• Necessary information should be included in the ITIN database for future computer matching initiatives.

Management’s Response: IRS management generally concurs with the recommendations in this report.

The IRS will request that the study groups for the Joint committee on Taxation and the Secretary of the Treasury address the interrelationship of taxpayer confidentiality provisions under the Internal Revenue code (IRc) with provisions of the Illegal Immigration Reform and Immigrant Responsibility Act of 1996.

A Privacy Act Notice will be added to the Application for IRS Individual Taxpayer Identification Number (Form W-7), and a determination will be made as to whether the Form W-7 will require a disclosure statement under the definition of an "individual federal income tax return form."

The commissioner will be informed of the concern that certain illegal aliens may be receiving tax benefits under the IRc. currently, the IRS does not have authority to act on the related recommendation.

****2a,2b,2e****. Using information from the ITIN database, checks to measure compliance with the terms of Acceptance Agent Agreements will be initiated by the IRS Foreign Payments Branch.

A Request for Information Services will be prepared and submitted to request updates to the ITIN database screen display to permit the display of cross-reference information.

Management’s complete response to the draft report is included in Appendix IX.

Office of Audit comment: ****2a,2b,2e****. The IRS needs to examine the overall Revenue Protection Strategy to ensure that returns with ITINs ****2a,2b,2e****. This could be conducted on a sample basis. Subsequent to the issuance of the draft report, the Office of Audit determined that there were 180,662 Tax Year 1997 Form 1040 returns filed with the ITIN as the identifying number.

2a = Law Enforcement criteria
2b = Law Enforcement Guideline(s)
2e = Law Enforcement Procedure(s)