Illegal Immigrants and the abuse of the ITIN

In recent years, one of the main concerns with the management of the Individual Taxpayer Identification Number system has been abuse and fraud by illegal immigrants. Indeed, just a few short years ago there was something of a scandal surrounding allegations that IRS officials were being told to process obviously fraudulent requests for ITINs. To counter that, the IRS has been pressured into implementing various changes to the system to ensure that the ITINs they issue are actually being used. Despite that, there seems to be little doubt that fraud continues to be a problem.

Part of the problem stems from the change in mission that the IRS engaged in with respect to these numbers. Most people are unaware that these numbers were created to deal with the Agency’s inability to properly account for roughly eighty billion dollars in investment income for nonresident aliens. The entire purpose was to provide those aliens with an identifying number that could be used to verify their identities on the income documents that they presented when filing taxes. That was almost two decades ago.

Since that time, the IRS went from providing these numbers to nonresident aliens to issuing them to resident aliens as well. That decision has been implemented without regard to whether those resident aliens are in the country legally or illegally, and has resulted in untold ITINs being issued to illegal immigrants over the last nineteen years.

Now this is where it gets tricky. Since anyone with an ITIN who files taxes is allowed to claim dependency exemptions just as any American citizen or other SSN holder could, there have been reports of illegal immigrants claiming and securing tax refunds by utilizing the Child Tax Credit features in the tax code. Aside from the fact that they are in the country illegally and thus not permitted to even work and earn income, that use of the dependent credit allowance would seem fair.

However, there are many who have not stopped with valid claims of dependents. Some have gone so far as to secure ITINs for their dependents that still reside outside of the United States – and then listed those dependents on their tax returns. That has enabled many of these illegal immigrants to obtain thousands of dollars in fraudulent refunds – and has been estimated to cost U.S. taxpayers billions of dollars each year.

Worse, the IRS has apparently known about the abuse for years, and taken few if any concrete steps to address it. Just two years ago, the Agency’s Inspector General reported that the IRS sent out a total of 2,706 refunds to one bank account – and all 2,706 were believed to be possible illegal immigrants. Other examples include situations in which the IRS issued more than 15,000 separate ITINS to one single address in Phoenix, AZ. A similar amount of separate ITINS were issue to one address in Texas.

There seems to be little argument about whether fraud is occurring. The question is: what can be done about it? Well, the IRS has new rules that place limits on the number of refunds that can be sent to any single bank account. That limit is now three. Whether these and other rule changes can help to reduce abuse of the ITIN system remains to be seen, but at least it’s a start.

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