Illegal aliens and their employers received a quarter-trillion dollars in tax deductions and credits that were targeted for law-abiding U.S. workers and businesses. Congress can – and must — stop the illicit giveaways as lawmakers tackle tax reform legislation.
In plain sight, American employers and unauthorized aliens cashed in on two lucrative tax breaks, totaling an estimated $296 billion, over the past 10 years.
Deducting wages paid to illegal aliens
Section 162(e) of the Internal Revenue Code denies a business deduction for “illegal payments.” Though it is illegal to employ unauthorized alien workers, the IRS has simply ignored that rule, even when it has determined that employers knowingly broke the law.
The latest conservative estimates indicate that U.S. employers paid — and took tax deductions on — $165 billion to illegal aliens over the last decade.
Beyond that, many illegal workers – perhaps as many as 35 percent – labor in a shadowy cash economy. The Center for Immigration Studies figures that $25.4 billion in such wages dodged taxation. Over 10 years, that adds up to a $254 billion erosion in the tax base.
Child tax credits to illegal aliens
Section 24(a) of the Internal Revenue Code allows a $1,000 per-child tax credit for low-earning taxpayers. Payment of the Additional Child Tax Credit (ACTC) to illegal immigrants appears to violate the Personal Responsibility and Work Opportunity Act of 1996, which states that illegal aliens are “not eligible for any federal public benefit.”
Again, the IRS has flouted the law by issuing ACTC refunds to illegal residents. In 2010, a federal audit pegged the giveaway at $4.2 billion annually. Based on that estimate, limiting the credit to citizens and green card holders with verifiable Social Security numbers would increase federal tax revenues by $42 billion over 10 years.
Watchdog.org reported in 2013 that ACTC disbursements – paid by the IRS even if the filer paid no income taxes — have grown rapidly with the agency’s acceptance of Individual Taxpayer Identification Numbers as substitutes for Social Security numbers. ITIN holders are not required to prove legal residency, and new ITIN applications are running at the rate of 1 million a year.
In one egregious case, the IRS sent more than $7.2 million in ACTC refunds to a Virginia woman who filed more than 1,700 tax returns with stolen identifications used by illegal immigrants, mainly from Mexico. The tax returns frequently cited foreign dependents, which increased the refund amounts.
Illegal aliens with deferred action (DACA and DAPA) also are eligible to claim the Earned Income Tax Credit (EITC). An Inspector General’s report found that $15.6 billion in improper payments EITC were disbursed in 2015, but the IG did not break down the amount received by illegal immigrants.
Congress must rein in the IRS’s extra-legal actions that enable fraud and abuse on a massive scale.
Rep. Steve King, R-Iowa, has introduced H.R. 176, the New Illegal Deduction Elimination Act, which would amend Section 162(e) to clarify that no deduction is allowed for wages paid to unauthorized alien workers.
Similarly, Congress must restate the obvious on the child tax credits: that only U.S. citizens and legal U.S. residents are eligible for the tax break in Section 24(a).