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Chapter 3

Illegal Immigration and Taxes

“A Nation That Cannot Control its border is not a nation.”

—Ronald Reagan, fortieth US president

Illegal immigrants and taxes

What you see is only part of the story. For examples, see below.

What you see

Illegal immigrants contribute significantly to state and local taxes, collectively paying an estimated $11.74 billion a year. Contributions range from just over $550,000 in Montana with an estimated undocumented population of one thousand to more than $3.1 billion in California, home to more than three million illegal immigrants

(Source: Undocumented Immigrants’ State and Local Tax Contributions, Institute on Taxation and Economic Policy).

Illegal immigrants nationwide pay on average an estimated 8 percent of their incomes in state and local taxes (this is their effective state and local tax rate). To put this in perspective, the top 1 percent of taxpayers pay an average nationwide effective tax rate of just 5.4 percent

(Source: Undocumented Immigrants’ State and Local Tax Contributions, Institute on Taxation and Economic Policy).

The complete picture

Total tax deductions by illegal immigrants

Total federal taxes paid: $15,447,897,700

Total state and local taxes: $3,520,960,000

Total tax contributions: $18,968,857,700

Total governmental expenditures on illegal immigrants

Total federal expenditures: $45,870,474,332

Total state and local expenditures: $88,992,981,032

Total national expenditures: $134,863,455,364

Total fiscal burden of illegal immigrants on US taxpayers

$115,894,597,664

Source: Fair—The Fiscal Burden of Illegal Immigration on US Taxpayers (2017)

The majority of illegal aliens seeking employment in the United States have lived in an environment where they have little fear of deportation, even if discovered. This has created an environment where most illegal aliens are both able and willing to file tax returns. Because the vast majority of illegal aliens hold low-paying jobs, those who are subject to wage deductions actually wind up receiving a complete refund of all taxes paid, plus net payments made on the basis of tax credits. As a result, illegal aliens actually profit from filing a tax return and, therefore, have a strong interest in doing so. The Tax Policy Center, an Urban Institute / Brookings Institution joint project, notes that “most low-income households do not pay federal income taxes, typically because their incomes are lower than the combination of their allowed standard deduction and their personal and dependent exemptions, or because they receive substantial rebates via refundable tax credits”(65 [emphasis added]).

Source: Fair—The Fiscal Burden of Illegal Immigration on US Taxpayers (2017)

What you see

Granting legal status to all illegal immigrants in the United States as part of a comprehensive immigration reform and allowing them to work legally would increase their state and local tax contributions by an estimated $2.18 billion a year. Their nationwide effective state and local tax rate would increase to 8.6 percent

(Undocumented Immigrants’ State & Local Tax Contributions, Institute on Taxation and Economic Policy).

The complete picture

Taxes collected from illegal aliens offset fiscal outlays and, therefore, must be included in any examination of the cost of illegal immigration. However, illegal alien apologists frequently cite the allegedly large tax payments made by illegal aliens as a justification for their unlawful presence and as a basis for offering them permanent legal status through a new amnesty, similar to the one enacted in 1986. The argument is nothing more than a red herring. In fact, in November 2016, the Heritage Foundation estimated that an amnesty would require an immediate tax increase of $1.29 trillion to finance the infrastructure, school, welfare, and other public costs associated with illegal aliens

(Source: Fair—The Fiscal Burden of Illegal Immigration on US Taxpayers (2017))

I must digress for a moment. During my endless research, I have come across more than one heated response from Cato Institute on fair articles, and the response to the above study is no exception.

In their estimation of illegal immigration on property values, I believe they take estimates of statistical evaluation to a whole new level.

And I quote as follows:

FAIR also undercounts the tax revenue generated by illegal immigrants. The first and most egregious undercount is that they ignore how increased housing demand raises the value of all real estate per county which also raises property tax revenue. According to research by economist Jacob Vigdor, each immigrant raises the value of all homes in their county by 11.5 cents. The average immigrant also lives in a county with 800,000 housing units. The locations of illegal and legal immigrants are closely correlated so we can assume that the typical illegal immigrant also lives in a county with 800,000 housing units. If the typical illegal immigrant increases the value of all housing unit prices by 11.5 cents, then illegal immigrants increase nationwide housing values by about $1 trillion. Using the 1.15 percent average annual property tax rate, the increase in housing values created by illegal immigrants results in $12.2 billion in additional tax revenue. Adjusting for the extra property taxes paid by property owners as a result of illegal immigration boosting housing values increases tax revenue by $11.2 billion over FAIR’s estimate.

This method seems to make a lot of assumptions at multiple levels and appears to be taken the same level of statistical manipulation as they accuse the Fair.org.

To be fair, they do come up with a revision of between 3.3 billion to 15.6 billion in fiscal costs. That’s quite the spread. Not to mention, the calculations seem to be taken that each immigrant has their own residence, which is not practical. One would need to use households, not individuals, given that the average undocumented household is 4 (Pew Research). Unauthorized immigrants live in 5.2 million U.S. households that include a total of 20.2 million adults and children.

And in the end, they make the following statement: “This does not mean that the negative fiscal impact of illegal immigration is $3.3 to $15.6 billion annually. It merely means that using the correct numbers massively reduces their cost estimate.”

So cutting to the bottom line, this statistical manipulation used by both sides comes to this. Illegal immigration is a fiscal drain on the system.

As we end this segment, it is best put by the Center for Immigration Studies in an article from October 28 titled “Enforcing Immigration Law Is Cost Effective”:

The reason illegal immigrants are unambiguously a net fiscal drain is that less-educated people, native-born or immigrant, earn on average modest wages and as a result they tend to make modest tax contributions, while needing significant social services. As we pointed out in our prior study, research by the Center for Immigration Studies, the Pew Research Center, the Heritage Foundation, and others have all found that a very large share of illegal immigrants have relatively few years of schooling—most have not completed high school or have only a high school education. The fiscal drain illegal immigrants create is not because they are all lazy and on welfare, nor it simply because they often work off the books and don’t pay taxes. Rather they tend to earn wages commensurate with their education levels and, as result, they typically have low incomes on average, though there are individual exceptions. Those with low incomes as a group, regardless of legal status, use more in public services than they pay in taxes. It’s why cities and states worry so much about losing their middle- and upper-income tax base. It is middle- and upper-income residents who pay most of the taxes, which does not describe the average illegal immigrant.

ITINs (individual tax identification numbers)

The ITIN program was created by the IRS in July 1996 so that foreign nationals and other individuals who are not eligible for a social security number (SSN) can pay the taxes they are legally required to pay.

The application process is designed to facilitate tax payment, and the fact that the IRS does not share applicants’ private information with immigration enforcement agencies is key to tax compliance.

What you see

An article from the American Prospect titled “Denying the Child Credit to Undocumented Children” was released on June 28, 2018.

Its focus is a little-noticed provision in the Republican tax reform that stripped billions in tax benefits from an estimated one million mostly low-income undocumented children residing in the United States.

It goes on and states this:

Currently, unauthorized immigrants are able to claim the credit by applying for a nine-digit Individual Taxpayer Identification Number, or ITIN, which allows them to file state and federal tax returns, even without a Social Security number. The new requirement, which will go into effect next year, will render ineligible roughly one million undocumented children, according to a Center on Budget and Policy Priorities analysis of data from the Pew Hispanic Center.

The change threatens to inflict greater poverty on a mostly low-income working population that depends heavily on such credits. In 2013 alone, some 4.4 million tax returns were filed using ITINs, claiming child tax credits worth $6 billion, according to a report on refundable tax credits by the Government Accountability Office (GAO). Almost a third of ITIN filers claiming child tax credits that year had incomes of less than $40,000. Most ITIN-filers are undocumented.

It added that “eliminating all access to tax benefits for undocumented immigrants has long sat atop the wish list of many conservatives, who have vilified undocumented immigrants and accused them of large-scale tax fraud. But the Republicans have displayed a studied disinterest in the large-scale tax frauds by the rich, which will only be intensified by the Tax Act.”

That’s a pretty dark picture, but there’s some facts that seem to be neglected in this rendition of illegal immigrants being victimized.

The complete story

In the 2010 processing year, more than three million returns were filed with ITINs. Of these, 2.3 million paid no federal income taxes and collected an aggregate of $4 billion from the Treasury in refundable tax credit money from the ACTC. Of those who did not file for the ACTC, most used the CTC to reduce or eliminate their tax liability and thereby recover all or part of any federal income tax money withheld by employers. Of all the 2010 ITIN filers, fewer than one-quarter paid any federal income taxes, which amounted to about $0.87 billion in total. Thus, on a net basis, ITIN filers gained $3.13 billion ($4.0 billion minus $0.87 billion) from the IRS in the 2010 processing year. An approximation of the total net outflow of IRS funds to ITIN filers for the 2005–2010 processing years comes to 7.37 billion.

(Source: Center for Immigration Studies.) Illegal Immigration receive billions of dollars more from the IRS than they pay in.

Tax Loopholes Cost Billions 13 Investigates WTHR

Published April 26, 2012—updated December 2, 2016

INDIANAPOLIS—Inside his central Indiana office, a longtime tax consultant sits at his desk, shaking his head in disbelief.

“There is not a doubt in my mind there’s huge fraud taking place here,” he said, slowly flipping through the pages of a tax return.

The tax preparer does not want you to know his name for fear of reprisal, but he does want you to know about a nationwide problem with a huge price tag.

He came to 13 Investigates to blow the whistle.

“We’re talking about a multi-billion dollar fraud scheme here that’s taking place and no one is talking about it,” he said.

The scheme involves illegal immigrants—illegal immigrants who are filing tax returns.

How it works

The Internal Revenue Service says everyone who is employed in the United States—even those who are working here illegally—must report income and pay taxes. Of course, undocumented workers are not supposed to have a social security number. So for them to pay taxes, the IRS created what’s called an ITIN, an individual taxpayer identification number. A 9-digit ITIN number issued by the IRS provides both resident and nonresident aliens with a unique identification number that allows them to file tax returns.

While that may have seemed like a good idea, it’s now backfiring in a big way.

Each spring, at tax preparation offices all across the nation, many illegal immigrants are now eagerly filing tax returns to take advantage of a tax loophole, using their ITIN numbers to get huge refunds from the IRS.

The loophole is called the Additional Child Tax Credit. It’s a fully-refundable credit of up to $1000 per child, and it’s meant to help working families who have children living at home.

But 13 Investigates has found many undocumented workers are claiming the tax credit for kids who live in Mexico—lots of kids in Mexico.

“We’ve seen sometimes 10 or 12 dependents, most times nieces and nephews, on these tax forms,” the whistleblower told Eyewitness News. “The more you put on there, the more you get back.”

The whistleblower has thousands of examples, and he brought some of them to 13 Investigates. While identifying information such as names and addresses on the tax returns was redacted, it was still clear that the tax filers had received large tax refunds after claiming additional child tax credits for many dependents.

“Here’s a return right here: we’ve got a $10,3000 refund for nine nieces and nephews,” he said, pointing to the words “niece” and “nephew” listed on the tax forms nine separate times.

“We’re getting an $11,000 refund on this tax return. There’s seven nieces and nephews,” he said, pointing to another set of documents. “I can bring out stacks and stacks. It’s just so easy it’s ridiculous.”

20 kids = $30,000

WTHR spoke to several undocumented workers who confirmed it is easy.

They all agreed to talk with WTHR investigative reporter Bob Segall and a translator as long as WTHR agreed not to reveal their identity.

One of the workers, who was interviewed at his home in southern Indiana, admitted his address was used this year to file tax returns by four other undocumented workers who don’t even live there. Those four workers claimed 20 children live inside the one residence and, as a result, the IRS sent the illegal immigrants tax refunds totaling $29,608.

13 Investigates saw only one little girl who lives at that address (a small mobile home). We wondered about the 20 kids claimed as tax deductions?

“They don’t live here,” said the undocumented worker. “The other kids are in their country of origin, which is Mexico.”

He later explained none of the 20 children have ever visited the United States—let alone lived here.

So why should undocumented workers receive tax credits for children living in a foreign country, which is a violation of IRS tax rules?

“If the opportunity is there and they can give it to me, why not take advantage of it?” the worker said.

Other undocumented workers in Indiana told 13 Investigates the same thing. Their families are collecting tax refunds for children who do not live in this country. Several of the workers told WTHR they were told it was legal for them to claim the tax credit for a child who does not live in the United States.

IRS was repeatedly warned

“The magnitude of the problem has grown exponentially,” said Russell George, the United States Department of Treasury’s Inspector General for Tax Administration (TIGTA).

And he says the IRS has known about the problem for years.

George has repeatedly warned the IRS that additional child tax credits are being abused by undocumented workers. In 2009, his office released an audit report that showed ITIN tax filers received about $1 billion in additional child tax credits. Last year, the inspector general released a new report showing the problem now costs American tax payers more than $4.2 billion.

“Keep in mind, we’re talking $4 billion per year,” he said. “It’s very troubling.”

What George finds even more troubling is the IRS has not taken action despite multiple warnings from the inspector general.

“Millions of people are seeking this tax credit who, we believe, are not entitled to it,” said the inspector general. “We have made recommendations to [IRS] as to how they could address this, and they have not taken sufficient action in our view to solve the problem.”

Other information obtained from the TIGTA audits include:

Claims for additional child tax credits by ITIN filers have skyrocketed during the past decade, from $161 million in 2001 to $4.2 billion in tax year 2010.

Undocumented workers filed 3.02 million tax returns in 2010. 72% of those returns (2.18 million) claimed the additional child tax credit.

In 2010, the IRS owed undocumented workers more in claimed additional child tax credits than it collected from those workers in taxes.

Agency responds—sort of

What does the IRS have to say about all this?

The agency sent WTHR a statement, defending its policy of paying tax credits to illegal immigrants.

“The law has been clear for over a decade that eligibility for these credits does not depend on work authorization status or the type of taxpayer identification number used. Any suggestion that the IRS shouldn’t be paying out these credits under current law to ITIN holders is simply incorrect. The IRS administers the law impartially and applies it as it is written,” the statement said.

George disagrees with that position and believes the IRS should be doing more to prevent undocumented workers from getting billions in US tax dollars.

“The IRS is not doing something as simple as requesting sufficient documentation from people seeking this credit,” he said. “Once the money goes out the door, it’s nearly impossible for the IRS to get it back.”

Over the past month, WTHR has tried to ask the IRS more questions about its efforts to prevent abuse involving additional child tax credits.

Despite repeated phone calls, e-mails and a visit to IRS headquarters in Washington, the agency said none of its 100,000 employees had time to meet with 13 Investigates for an interview. An IRS spokeswoman said all staff were too busy because of the tax filing deadline in mid-April.

Apparently, the IRS doesn’t have time to respond to some tax preparers, either.

Last year, our whistleblower noticed dozens of undocumented workers had used phony documents and false income to claim tax credits. He reported all of it to the IRS.

“These were fraudulent, 100% fraudulent tax returns, but I got no response; absolutely none. We never heard a thing,” he said. “To me, it’s clear the IRS is letting this happen.”

The IRS tells WTHR it can do nothing to change the current system unless it gets permission from Congress. In other words, according to the IRS, closing the loophole would require lawmakers to pass a new law specifically excluding illegal immigrants from claiming additional child tax credits.

The big questions now: Is Congress willing to do that?

Full statement to WTHR from the Internal Revenue Service

The law has been clear for over a decade that eligibility for these credits does not depend on work authorization status or the type of taxpayer identification number used. Any suggestion that the IRS shouldn’t be paying out these credits under current law to ITIN holders is simply incorrect. The IRS administers the law impartially and applies it as it is written. If the law were changed, the IRS would change its programs accordingly. The IRS disagrees with TIGTA’s recommendation on requiring additional documentation to verify child credit claims. As TIGTA acknowledges in this report, the IRS does not currently have the legal authority to verify and disallow the Child Tax Credit and the Additional Child Tax Credit during return processing simply because of the lack of documentation. The IRS has procedures in place specifically for the evaluation of questionable credit claims early in the processing stream and prior to issuance of a refund. The IRS continues to work to refine and improve our processes.