Inspector General: IRS Management Discouraged Employees from Discovering Illegal Alien Tax Fraud

The Treasury Inspector General for Tax Administration released a report last week indicating that Internal Revenue Service (IRS) managers discouraged their employees from detecting illegal alien tax fraud. (Fox News, Aug. 9, 2012)

The latest Treasury Inspector General report legitimizes years of employee complaints about deficiencies in the Individual Taxpayer Identification Number (ITIN) application review and verification process. Although illegal aliens are unauthorized to work in the U.S., they are required to comply with federal tax laws. As a result, the IRS grants illegal aliens ITINs to allow them to file tax returns.

However, the report reveals that IRS management “has not established adequate internal controls to detect and prevent the assignment of an ITIN to individuals submitting questionable applications.” (See TIGTA Report 2012-42-081 at p. 6, July 16, 2012) According to the Inspector General’s findings, IRS management has:

• Created an environment which discourages tax examiners responsible for reviewing ITIN applications from identifying questionable applications;
• Eliminated successful processes used to identify questionable ITIN application fraud patterns and schemes; and
• Established processes and procedures that are inadequate to verify each applicant’s identity and foreign status.  (Id.)

In particular, the report notes that IRS management cares more about quickly processing ITIN applications than ensuring it grants ITINs to only qualifying individuals. The report reads, “The lack of emphasis on identifying questionable applications is demonstrated by the processing time periods set for tax examiner review of the applications, the lack of extensive training on identifying questionable applications, and the criteria tax examiners are required to follow when identifying an application as questionable.” (Id. at p. 6) Even more telling of the IRS’ unwillingness to stop fraud, the report notes that even if criteria and training were adequate, IRS protocol makes it unrealistic to expect employees to be able to identify fraudulent applications because the IRS accepts mere copies of supporting documentation rather than requiring the original document or a certified copy. (Id. at p. 7) The report concludes that as a result of such policies, the IRS ends up assigning ITINs to individuals with fraudulent applications — primarily illegal aliens — which enables them to commit tax fraud.

Alarmingly, the IRS has known of such tax fraud for at least a decade, following a September 2002 report revealing that illegal aliens had been using ITINs to collect the Additional Child Tax Credit (ACTC). Under the ACTC, illegal aliens can receive tax refunds even if they did not pay any taxes themselves. Because of this, the Inspector General said, “it is essential that the IRS have adequate processes and procedures that ensure only qualified and eligible individuals are assigned an ITIN.” (Id.)

Nonetheless, cases of illegal aliens committing ACTC fraud are rampant. Earlier this year, an investigation by an Indianapolis news station uncovered that illegal aliens working unlawfully in the U.S. were claiming the tax credit for minor relatives — primarily nieces and nephews — living outside of the country, in Mexico. The Indianapolis reporter also spoke with an illegal alien who revealed that multiple illegal aliens had been scamming taxpayers by using the same address to claim the ACTC for 20 minors, when in fact only one child actually lived at the given address. His explanation: “If the opportunity is there and they [the government] can give it to me, why not take advantage of it?” (NBC wthr.com, July 5, 2012)

Moreover, the Inspector General released a report last year showing that illegal aliens received an astounding $4.2 billion in taxpayer dollars by claiming the ACTC in 2010. (See TIGTA Report 2011-41-061, July 7, 2011; see also FAIRLegislative Update, Sept. 6, 2011)Although several Members of Congress have introduced bills to eliminate the ability of illegal aliens to receive this tax credit by requiring a valid social security number, Congressional leadership refuses to act.  

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