Statement of Nina E. Olson, National Taxpayer Advocate, Internal Revenue Service
Testimony Before the Subcommittee on Oversight
of the House Committee on Ways and Means
March 10, 2004
Chairman Houghton, Chairman Shaw, Ranking Member Pomeroy, Ranking Member Matsui, and Members of the respective subcommittees, thank you for inviting me to appear before you today to discuss Individual Taxpayer Identification Numbers and their impact on tax administration. In announcing this hearing, Chairmen Houghton and Shaw noted that the Social Security Administration, the Internal Revenue Service, and the U.S. Department of Homeland Security all have responsibilities with respect to Social Security Numbers and Individual Taxpayer Identification Numbers, and that “each agency’s policies are designed to promote its individual goals.” This hearing today is intended, in part, to help them determine whether “better coordination across agency boundaries is needed to promote enforcement of laws and regulations.”
Some parties – both inside and outside government – believe that an apparent conflict between the laws governing the U.S tax, social security, and immigration systems hampers the effective administration of these programs. I intend to show in my testimony that there is, in fact, no actual conflict between these systems but instead a delicate balance between these three systems that enables each to fulfill its individual mission effectively without harming the mission of the others. I will also discuss why certain proposed solutions to this perceived conflict will have a serious impact on tax administration without resolving the problems for the other agencies.
Tax Administration Considerations
Since its earliest incarnation in 1862, the Internal Revenue Service (IRS) has been charged with administering and enforcing this nation’s internal revenue laws. As part of its mission, the IRS must create systems that enable taxpayers who wish to comply with the tax laws to do so with minimal burden or obstacles. It must also ensure that taxpayers who do not wish to fully comply with the tax laws, or who actively attempt to evade or undermine these laws, face the appropriate level of enforcement actions, including prosecution where necessary. The IRS’s systems – on both the customer service and compliance/enforcement sides of the house – must incorporate protections of fundamental taxpayer rights. Accordingly, and perhaps most importantly, the IRS must zealously protect the confidentiality of the tax information required for making the determination of the correct amount of tax that each U.S. taxpayer should pay.[1]
These four essential elements – confidentiality, customer service, enforcement, and taxpayer rights – are all implicated as the IRS attempts to fulfill its mission with respect to a particular group of taxpayers – those who are not eligible for SSNs and thus must obtain an ITIN to meet their tax obligations – and a subset population within that group, namely, taxpayers who are working inside the United States without legal authorization to do so. It is particularly challenging to reconcile these elements when faced with problems such as identity theft and domestic and international terrorism, which clearly create innocent victims. But reconcile them we must.
Treatment of Aliens for Tax Purposes
In general, alien persons (that is, individuals who are not U.S. citizens) are classified as either nonresident aliens or resident aliens. Prior to 1984, the Internal Revenue Code (IRC) did not provide a definition for the terms “resident alien” or “nonresident alien.” Treasury regulations under IRC § 871 generally required the IRS to apply a subjective, facts-and-circumstances test that turned, in part, on the alien’s intentions as to the length and nature of his stay in the United States.[2]
The regulations defined a “nonresident alien individual” as one “whose residence is not within the United States and who is not a citizen of the United States.”[3] On the other hand, an individual was considered a U.S. resident for tax purposes if he (1) had intent to make residence in the United States and (2) was physically present in the United States. Physical presence alone, however, was not sufficient to obtain resident status. The regulations provided that an alien’s residence depended on whether he was “a mere transient or sojourner” in the United States.[4] Thus, an alien could be a resident for tax purposes despite his not being a resident for immigration purposes or present in the United States for half the tax year.[5]
The regulations also created an “evidentiary” presumption that an alien was presumed to be a nonresident alien, regardless of presence (legal or illegal) in the United States. This presumption could be rebutted by evidence that the alien had made a declaration of intent to become a U.S. citizen[6] or by proof of the alien’s definite intent to obtain U.S. residence, or by evidence that the length and nature of the alien’s stay in the U.S. made him a resident.[7] This regulatory presumption created some confusion in application.[8]
It was this subjective and confusing state of the law that led Congress in 1984 to distinguish more clearly between resident and nonresident aliens in the Internal Revenue Code.[9] The Joint Committee on Taxation described the rationale for the changes as follows:
Congress believed that the tax law should provide a more objective definition of residence for income tax purposes. Congress believed that prior law did not provide adequate guidance with respect to residence status. Congress understood that an objective definition might allow some aliens who should be taxable as residents to avoid resident status, and would impose resident status on some aliens who are not residents under the current rules. On balance, however, Congress found that the certainty provided by the Act’s objective definition outweighed other considerations.[10]
Thus, Congress enacted IRC § 7701(b), which defines the terms “resident alien” and “nonresident alien.” An alien individual is considered a resident alien if he or she satisfies either the “lawful permanent resident” (or “green card”) test[11] or the “substantial presence” test.[12] A nonresident alien is an alien individual who is neither a citizen of the United States nor a resident of the United States, as defined above.[13]
Nonresident aliens are generally subject to U.S. income taxation on their U.S.-source income and on certain foreign-source income that is effectively connected with the conduct of a trade or business within the United States.[14] Resident aliens, on the other hand, are subject to U.S. taxation on their worldwide income under the same rules as U.S. citizens.[15]
In creating this statutory scheme, Congress acknowledged that it was creating an imperfect system but that it had struck the right balance between the goals of tax administration and the issues of alienage and immigration status. That is, Congress essentially decided that U.S. immigration status was not solely determinative of a taxpayer’s status as a resident alien or nonresident alien for tax purposes. In order to distribute the tax burden fairly, Congress consciously deviated from the immigration classification system.[16] The Joint Committee on Taxation provided the following explanation:
Congress believed that aliens who have entered the United States as permanent residents and who have not officially lost or surrendered the right to permanent U.S residence should be taxable as U.S. residents. These persons have rights in the United States that are similar to those afforded U.S. citizens. . . ; equity demands that they contribute to the cost of running the government on the same basis as citizens.
Congress similarly decided that it was appropriate to treat as residents individuals who spend significant time in the United States. Recognizing that there is no single system that is perfect, Congress believed that a regime that depends on length of stay meets the criteria of objectivity and establishing nexus with the United States and is appropriate.[17]
Individual Taxpayer Identification Numbers (ITINs)
Individual Taxpayer Identification Numbers (ITINs) were created to improve the administration of the tax system with respect to individuals who are unable to obtain Social Security Numbers (SSNs) but have some nexus with the United States tax system. These individuals are a diverse group, including nonresident alien investors in U.S. financial instruments, nonresident alien sellers of U.S. real property, nonresident alien persons claiming benefits under a tax treaty, and resident aliens who are working in the United States without legal authorization under U.S. immigration laws (“undocumented workers”[18]). ITINs are available to resident and nonresident aliens, their spouses, and their dependents who are not eligible to receive SSNs and who have a need for a number for tax administration purposes.
An ITIN does not authorize an alien to work in the United States, grant an immigration status, or qualify the alien for benefits, such as the Earned Income Tax Credit (EITC) or Social Security. To receive an ITIN, individuals must complete Form W-7, Application for IRS Individual Taxpayer Identification Number, and attach documentation validating his or her identity and foreign alien status.[19] Form W-7 applications are processed at the IRS’s Philadelphia campus.
From a purely tax administration perspective, ITINs are a process improvement. They enable taxpayers who have an obligation to report income or pay taxes under the United States tax system to comply with that requirement. ITINs also enable the IRS to track taxpayer compliance with those requirements and take appropriate enforcement actions where compliance is lax or lacking.[20]
The creation of ITINs, then, is a positive step in tax administration – a system improvement. ITINs are, however, associated with problems, including some that impact tax administration. These problems arise from the legitimate application of U.S. immigration and Social Security laws as well as our legitimate concerns about international and national terrorism.
Problems Associated with ITINs
As discussed above, Congress determined in 1984 that alien individuals who meet either the green card test or the substantial presence test under the Code are considered resident aliens for U.S. tax purposes. Although the green card test keys off U.S. immigration status, the substantial presence test, by definition, acknowledges that a resident for tax purposes may not be a resident for immigration purposes. It is this divergence from immigration law that places the IRS and taxpayers alike in a difficult position. It is this divergence that creates enormous, and in most instances undue, pressure on the IRS to share data with agencies that will, in fact, impair tax administration. And it is this divergence that creates obstacles for taxpayers who have strong incentives to comply with the tax laws and leads to instances of identity theft within the tax system.
Undocumented Workers and the Tax System
There are approximately 9.3 million individuals whose presence in the United States is not authorized by U.S. Citizenship and Immigration Services (USCIS) within the Department of Homeland Security (DHS). About 6 million of this group are working in the United States, including virtually all undocumented males (96 percent) and 60 percent of undocumented females.[21] Approximately, 130 million individual income tax returns are now filed each year. Therefore, the approximately 6 million undocumented workers constitute a significant portion of persons with a potential income tax obligation.
While more than 4 million undocumented immigrants have resided in the United States for less than 5 years, many have been here for a long time. Approximately 4 million undocumented immigrants arrived in the United States prior to 1995.[22] More than 4 million adults are in approximately 2 million undocumented families. These families include more than 1.5 million children who are undocumented immigrants and another 3 million children who are citizens by virtue of being born in the United States.[23]
Taxpayers who are undocumented workers have a strong incentive to comply with the federal tax laws. Recently, for the first time in decades, the number of naturalized immigrants has grown, from 6.5 million in 1990 to over 11 million in 2002.[24] U.S. immigration procedures require applicants for visa status adjustment and naturalization to provide tax information and demonstrate tax compliance as an indicator of the applicant’s ethical conduct and his or her willingness and ability to meet legal obligations.[25]
IRS ITIN data demonstrates this strong tendency for compliance among ITIN holders.[26] Nearly 75 percent of the 3.1 million ITINs issued in calendar years 1998-2001 have appeared on a tax return. Of those ITINs, about two-thirds of the ITINs were issued to residents and their spouses or dependents, nearly 25 percent were issued to nonresident aliens with a tax administration need, and the remaining 8 percent were issued to people with other needs.[27] As noted above, there are approximately 6 million undocumented workers in the United States. The Treasury Inspector General for Tax Administration (TIGTA) recently identified 353,000 Tax Year 2000 Forms 1040 filed with a primary ITIN and reporting wages.[28] As the IRS and stakeholders, including Low Income Taxpayer Clinics, continue to conduct outreach and education to these taxpayers about their rights and responsibilities, we can expect the number of ITIN returns reporting wages to increase. The increase in filings of such returns is not a problem, in and of itself. The problems arise from ancillary issues such as identity theft.
Undocumented Workers and Identity Theft: Impact on Tax Administration
All individuals must demonstrate to their potential employers that they have legal authorization to work in the United States.[29] A new employee must complete both IRS Form W-4, Employee’s Withholding Allowance Certificate, supplying a Social Security number that is valid for work purposes, and a USCIS Form I-9, (Immigration) Employment Eligibility Verification, providing the employer with documentary evidence of his or her identity and citizenship, resident, or alien status.
Undocumented workers, of course, have no such documentation. They are not authorized to work in the United States, and they cannot obtain Social Security numbers. These workers either steal, “borrow,” or fabricate Social Security numbers and obtain false identification documents using these numbers.[30] Employers then use these erroneous numbers on their annual Forms W-2, Wage and Tax Statement, reporting wages, earnings, and withheld taxes to the Social Security Administration and the IRS.
When an undocumented worker receives his Form W-2 with an erroneous SSN, he must decide whether and how he will file his returns. If the taxpayer decides to file his tax returns, he must next decide whether he should continue to use another person’s SSN on his return, or whether he will file his return reporting the income under his ITIN. If he chooses the latter course, the attachment of a W-2 with an erroneous SSN to an ITIN return is a clear admission that he has earned wages without authorization to work. If he instead continues to use the erroneous SSN on the tax return, he will be perpetuating his violation of the Internal Revenue laws.
If a taxpayer seeks tax advice from a legitimate and principled return preparer or representative, he should be advised to use his ITIN on the return and attach the Form W-2 with the SSN. Doing so, however, creates several procedural and processing consequences. First, according to the IRS, it cannot process the return electronically because the taxpayer identification number (TIN) on the W-2 does not match the TIN on the return. Thus, the taxpayer must file a paper return and cannot obtain tax preparation assistance from the IRS Taxpayer Assistance Centers (formerly known as “walk-in offices”).[31] Second, if the taxpayer does not already have an ITIN, he must complete a Form W-7, Application for IRS Individual Taxpayer Identification Number, and attach it, along with the required documentation, to the return. Once the mismatched return is filed, the IRS processes it under the ITIN, assesses the tax liability, and issues a refund or a notice of assessment and demand for payment of tax, as appropriate.
The story does not end there, however. The employer has reported wages earned by the taxpayer under a Social Security number that belongs to another person. In most instances, the Social Security Administration will not be able to post earnings to that SSN holder’s account because the name associated with the SSN does not match the name on the Form W-2. Therefore these earnings will be posted to the Social Security Administration’s suspense file, where they will sit unless and until something happens that enables SSA to reallocate the earnings to the appropriate worker.[32]
The IRS, on the other hand, has a wage document that tells it that the SSN holder has earned income that is not reported on his or her return. Thus, when the IRS conducts a computer match of information documents, this taxpayer is likely to receive a notice of unreported income from the IRS. (This initiative is called the Automated Underreporter Program, or “AUR.”) If the taxpayer calls the IRS to discuss the notice, the taxpayer will have to provide an acceptable explanation as to why the income is not properly attributable to him or her. For the IRS, this involves, in most instances, a lengthy, time-consuming, and manually-driven process of validating the taxpayer’s explanation, decreasing the proposed amount of additional tax from the notice, and working with the Social Security Administration to delete the wages paid under this SSN from the SSN holder’s earnings account. In many instances, the SSN holders either do not receive the proposed AUR assessment notice or do not understand it and are afraid to call the IRS. As a result, the tax attributable to these additional earnings will be assessed against the SSN holder.
This resolution process can take over a year to complete. If the issue is not resolved by the following filing season and the IRS’s system still shows that there is an outstanding assessment, the SSN-holder may have his subsequent year’s refund either frozen or offset. Because this process is worked on a yearly matching basis and the current IRS systems do not have a reliable identity fraud alert indicator on a taxpayer’s account, the taxpayer must repeat this process each year in which the identity theft occurs.[33]
Proposed Solutions and Their Impact on Tax Administration
It is clear from the above discussion that the use of ITINs in conjunction with SSNs poses problems for taxpayers (both the victims of identity theft and the ITIN holders), the IRS and the Social Security Administration. Because ITIN holders who are undocumented workers are violating the immigration laws, they also pose problems for the Department of Homeland Security.
These problems have led the IRS, the Treasury Inspector General for Tax Administration, and others to propose changes in ITIN administration as well as routine sharing of tax information between the IRS, Social Security Administration, and Federal immigration authorities. Let us examine some of these proposals.
Authorize the use of ITINs on Forms W-4 and W-2. We might address the Social Security Administration’s concerns about its increasing “suspense file” of unidentified earnings by changing the Treasury regulations to permit the use of an ITIN on Forms W-4 and W-2. Employers would not be subject to penalty for putting ITINs on these documents. This approach, however, would require a change in the Social Security Act to enable SSA to create a record of earnings under an ITIN. Further, and fatally, it would fly directly in the face of immigration law that requires workers to be authorized to work in the United States.
This proposal would force employers to acknowledge that they are hiring an undocumented worker. An undocumented worker seeking a job therefore would be unlikely to put an ITIN on a Form W-4 because it would shine a bright light on his immigration status. Instead, the worker would continue to place an SSN on the form. Thus, this proposal would merely exacerbate the tension between tax and immigration law without eliminating identity theft or tidying up SSA’s suspense files.
Authorize the IRS to disclose to employers a match or mismatch of employees’ names and identifying numbers. We might address the problem of mismatched or unmatched SSNs by amending the Code to require employers to submit all Forms W-4 to the IRS upon hiring new employees and amending IRC § 6103 to permit the IRS to inform employers when there is a mismatch. This approach, of course, does not resolve the problem of complete identity theft – that is, where the taxpayer has assumed not only the SSN but also the name of the SSN holder. Indeed, complete identity theft likely would increase precisely because it would enable undocumented workers to slip through, and complete identity theft creates far more serious problems for the victim. Further, as the Commissioner has noted in his testimony, this approach would impose an extra burden on employers without necessarily clearing up mismatches (that is, the employer could comply with his due diligence requirements and still not have resolved the mismatch).
Finally, this proposal would not stop identity theft. Let us assume an undocumented worker provides his true name and a fabricated SSN to his new employer. Under the proposal, the employer would submit this information to the IRS and would immediately be notified that there was a mismatch. The employer would contact the worker and ask him to resolve the mismatch. With this level of scrutiny, the undocumented worker, in all likelihood, would either move on to another employer, or worse, work for cash in the “underground economy.” He would continue to use the fabricated or stolen SSN. All we would accomplish, through this proposal, is force the undocumented worker underground and out of compliance with the tax system.
Authorize the IRS to disclose tax information to SSA and USCIS pertaining to undocumented workers. In its recent report on ITINs, TIGTA recommended that the IRS Deputy Commissioner for Services and Enforcement:
Coordinate with the BCIS [now USCIS] and the SSA to assess the benefits to these agencies of seeking legislation to broaden the IRS’s authority to share information with them regarding unauthorized resident aliens and seek legislation as warranted.[34]
For almost thirty years, since the enactment of the Tax Reform Act of 1976, Congress, the IRS, and taxpayers have had an understanding that tax returns and tax return information are, in general, confidential. All exceptions to this general rule of confidentiality must be specifically set forth in IRC § 6103. Recently, taxpayers’ confidence in the confidentiality of their tax information has been shaken by their awareness that this information is available to the Treasury Inspector General for Tax Administration.[35]
Congress has specifically authorized the IRS to disclose tax information for law enforcement purposes in two sections relevant to our discussion here today:
Disclosures for tax administration purposes: IRC § 6103(h)(2) provides that in matters involving tax administration, tax information shall be open to inspection by Department of Justice employees and officers who are “personally and directly engaged in, and solely for their use in”, a Federal grand jury proceeding or preparation for any proceeding before a Federal grand jury or any Federal or State court (or investigation that may lead to such a proceeding). Congress placed limits on this authority, including requiring that the taxpayer be a party (or potential party) to the proceeding or that the proceeding involve the determination of civil or criminal liability under the Code or the collection of tax imposed under the Code.
Disclosure to agencies for non-tax criminal cases: IRC § 6103(i)(1)provides that during the course of Federal nontax criminal investigations, Federal agencies must obtain an ex parte order from a Federal district judge or magistrate in order to gain access to tax returns and tax information provided by the taxpayer or the taxpayer’s representative.[36] Return information that is reported by third parties may be disclosed if the head of the Federal agency (or other specified official) submits a written request.[37] Further, the Secretary (or his delegate) may disclose, on his own initiative, to the appropriate head of agency, evidence of a Federal nontax crime where such evidence is not on a tax return and is not tax information provided by the taxpayer or the taxpayer’s representative.[38]
These provisions are narrowly tailored to insure that tax information, which is the cornerstone to our voluntary-compliance tax system, is only disclosed after much consideration has been given to the impact such disclosure would have on tax administration. Within these provisions, however, there is ample maneuvering room for Federal law enforcement agencies to obtain tax information when they can demonstrate the requisite compelling need.
Thus, notwithstanding our concern about persons who steal and use Social Security numbers to create identities for unlawful purposes, including terrorism, the answer to these problems does not lie in expanding the disclosure of tax information beyond the limits currently permitted under IRC § 6103. Such proposals would, in practice, have the effect of increasing the damage done to the innocent victims of identity theft and also undermine the IRS’s obligation to provide customer service to taxpayers who are attempting to comply with the tax laws.
In fact, we want these mismatch taxpayers to be part of the tax system and file their returns. That way, the IRS should be able to identify the stolen SSN and the correct ITIN. We could “fence off” the wages or other income reported under the stolen SSN, thereby protecting the identity theft victim from unnecessary IRS audits and collection actions. We could notify SSA of the correct number (the ITIN) to which to attribute earnings, and prevent overpayment of benefits to the SSN holder. And if USCIS or another Federal agency is investigating the ITIN holder, we would be able to provide tax information to that agency to the extent permissible under IRC § 6103.[39]
A Modest Proposal: The Status Quo Plus
The proposals discussed above do not solve but instead perpetuate (and possibly exacerbate) the problem of identity theft, increase tax noncompliance, and do not help enforce the immigration laws (because undocumented workers will move to the underground economy). Any solution must both protect national security and not undermine three important tax administration objectives -- compliance by taxpayers with the tax laws, the provision of customer service to those taxpayers, and the elimination of undue burden on taxpayers (and employers) trying to comply with the tax laws. The solution must also protect taxpayers from misuse of their tax data by third parties (identity theft for tax purposes).
In light of IRS data that clearly indicate that the majority of ITIN holders attempt to file and comply with the tax laws, the IRS should continue to encourage undocumented workers to obtain ITINs and assist all ITIN holders, including those who have Forms W-2 showing SSNs, to file returns under their ITINs. ITINs are the entry point for these taxpayers into the tax system. Any effort to restrict access to obtaining ITINs must be carefully scrutinized to determine whether the purpose for the restriction outweighs the tax administrator’s core and fundamental mission of helping taxpayers to meet their tax obligations.
Thus, I propose the following approach to the ITIN “problem”:
The advantage of this proposal is that it actually improves tax administration while remaining neutral to the administration of Social Security and immigration laws. It acknowledges that taxpayers filing SSN/ITIN mismatch returns are generally trying to comply with the tax laws, even at risk of having their immigration status detected. The proposal implements Congress’ explicit determination that the definition of resident alien for tax purposes should extend beyond its definition under immigration law. It permits the disclosure of tax information to other Federal agencies as currently authorized by IRC § 6103. And it helps identity theft victims. Fundamentally, the proposal maintains the delicate balancing act between the interests of tax administration and the interests of taxpayers without harming government’s other legitimate interests. In short, it defuses the “problem.”
[1] IRC § 6103(b)(1) and (2) refer to this information as “return” and “return information.”
[2] Staff of Joint Committee on Taxation, 98th Cong., 2d Sess., General Explanation of H.R. 4170 at 463 (Dec. 31, 1984)(hereinafter, “JCT”). See Treas. Reg. §§ 1.871-2 to -5 (as amended by T.D. 6500, 25 Fed. Reg. 11910 (Nov. 26, 1960)).
[3] Treas. Reg. § 1.871-2(a) (as amended by T.D. 6500, 25 Fed. Reg. 11910 (Nov. 26, 1960)).
[4] Treas. Reg. § 1.871-2(b); JCT, supra note 2.
[5] JCT, supra note 2 (citing Tongsun Park v. Comm’r, 79 T.C. 252, aff’d without published opinion, 755 F.2d 181 (D.C. Cir. 1985)). For a detailed discussion of pre-1984 law, see Joel D. Kuntz & Robert J. Peroni, U.S. International Taxation ¶ B1.02[2][b] (2002).
[6] Treas. Reg. § 1.871-4(c)(2).
[7]Id.
[8] See Kuntz & Peroni, supra note 5, at B1-B25.
[9] Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 138.
[10] JCT, supra note 2, at 463-464.
[11] IRC § 7701(b)(1)(A)(i). “A lawful permanent resident is an individual who has been lawfully granted the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws.” Treas. Reg. § 301.7701(b)-1(b)(1).
[12] IRC § 7701(b)(1)(A)(ii). An individual meets the substantial presence test if he or she has been present in the United States on at least 183 days during a 3-year period including the current year. The 183-day period is computed as follows:
Current Year: Each day of presence counts
as a full day.
First Preceding Year: Each day of presence counts as 1/3 of a day.
Second Preceding Year: Each day of presence counts as 1/6 of a day.
IRC §7701(b)(3). See also Treas. Reg. § 301.7701(b)-1(c).
[13] IRC § 7701(b)(1)(B).
[14] IRC § 864(c)(1)-(4). A flat 30 percent tax rate (or lower treaty rate) is imposed on a nonresident alien’s gross U.S. income that is not effectively connected with a U.S. trade or business. U.S. source net income that is effectively connected with a U.S. trade or business is subject to income taxation under the same rules that apply to U.S. residents. However, certain treaty exceptions may apply and thereby limit taxation or prevent double taxation. See IRC § 871.
[15] Treas. Reg. 1.1-1(b).
[16] There are recent examples where Congress chose to disregard immigration status as a matter of tax policy and effective tax administration. In 1998, Congress enacted IRC § 7526, which creates a grant program for funding Low Income Taxpayer Clinics that provide, in part, outreach and education to taxpayers who speak English as a Second Language. This legislation makes no distinction as to the immigration status of these taxpayers. The program was enacted after testimony before the National Commission on Restructuring the Internal Revenue Service and both houses of Congress that ESL taxpayers, including undocumented workers, needed assistance in complying with the tax laws.
[17] JCT, supra note 2, at 464.
[18] For purposes of this testimony, the term “undocumented workers” includes (1) workers who legally reside in the U.S. but do not have authorization to work in the U.S. and (2) workers who reside in the U.S. without authorization to either work or reside in the U.S.
[19] Internal Revenue Service, Understanding Your IRS Individual Taxpayer Identification Number, Publication 1915 (Rev. 02/2004), at 2.
[20] I have commented extensively, elsewhere, on the problems with the IRS’s implementation of the ITIN application process. See National Taxpayer Advocate, 2003 Annual Report to Congress, Publication 2104 (Rev. 12/2003), at 60-86.
[21] This estimate of the number of undocumented workers is derived by subtracting legal foreign-born residents from the total foreign-born population based on the March 2002 Current Population Survey (CPS) with an allowance for immigrants not included in the CPS. Data provided by Department of Homeland Security and other government agencies are used to estimate the number of legal residents. See Urban Institute Immigration Studies Program Paper: Undocumented Immigrants: Facts and Figures (Jan. 12, 2004).
[22] Urban Institute, Crossing Borders: Impact of Immigration (Feb. 3, 2004), at 3.
[23]Id.
[24] Urban Institute, Trends in Naturalization (Sept. 2003), at 2.
[25] Robert C. Divine, Immigration Practice, 59-61 (3rd ed. 1998). It is not necessary for the applicant to have paid his or her tax in full; the applicant may demonstrate that he or she has entered into an installment agreement or made other arrangements to pay federal taxes owing.
[26] In a recent report, the Treasury Inspector General for Tax Administration (TIGTA) stated that almost 25 percent of individual taxpayers who filed a Tax Year 2000 Form 1040 with an ITIN underreported an estimated $324 million in income. TIGTA noted in a footnote that the margin of error for this estimate is +/- $122 million, or +/- 37.6 %. See TIGTA, The Internal Revenue Service’s Individual Taxpayer Identification Number Creates Significant Challenges for Tax Administration (2004-30-023, Jan. 2004), at 4.
Leaving aside the difficulty of basing tax policy and tax administration decisions on data with this large a margin of error, there are many explanations for this unreported income. Undocumented workers are often transient workers, following various harvests; they often work for short periods – sometimes only one day with one employer; they share mail boxes and rely on others to forward mail. Each of these reasons alone could result in missing W-2 forms and inadvertent noncompliance.
[27] Individual Master File, Returns Transaction File, analysis conducted by MITS, Information Technical Services, Business Systems Development, Business Systems and Extracts, Calendar Years 1998 - 2001. Since data is unavailable to validate 1996 and 1997, and ITINs obtained in 2003 may take several years to show up on a tax return, we will report information on ITIN usage for 1998 - 2001. Of approximately 2.2 million distinctive ITINs that were included on tax returns for Tax Years 1998 - 2001, about 40 percent were used by a primary filer, 25 percent were used by a secondary filer, and about 33 percent were used to identify dependents.
[28] TIGTA Report, supra note 26, at 16. The total number of individual income tax returns with a primary and/or secondary ITIN exceeded one million in TY 2001.
[29] Section 274A(a)(1)(B)(i) of the Immigration and Nationality Act, 8 U.S.C § 1324A (1992), makes it unlawful for an employer to hire an individual without complying with the specific employment verification requirements established under the provision.
[30] IRC § 6723 imposes a penalty on the failure to comply with specified information reporting requirements. Treas. Reg. § 301.6723-1(a)(4)(ii)(A) defines “specified information reporting requirement” to include the provision of a taxpayer identification number on a tax return, statement or document. A few workers attempt to provide their employers with an ITIN for W-4 and I-9 purposes, but this practice should virtually cease with the IRS’s substitution of a letter for an ITIN card, and with its implementation of a more effective education and outreach program to employers about identifying an ITIN.
[31] The IRS has adopted the policy that it will only prepare electronically filed returns at the Taxpayer Assistance Centers (TACs). The IRS could develop a process that would enable W-2/ITIN mismatch returns to be electronically filed and thereby assist these taxpayers with return preparation.
[32] Some ITIN holders use the name of the SSN holder as well as the SSN for employment purposes. In these instances, the SSN holder has earnings attributed to his account incorrectly, thereby becoming eligible for benefits on earnings that he did not earn. When an employer reports earnings to SSA under an ITIN, the earnings will go into the SSA suspense file because SSA does not have a valid SSN under which to record the earnings. If the taxpayer later becomes eligible for an SSN, he can ask SSA to reallocate the ITIN earnings to his SSN account.
[33] I have personally represented taxpayers who were caught up in the IRS AUR program for years, trying to prove that they did not earn wages attributable to someone else’s using their SSNs. From October 1, 2003, to February 29, 2004, the Taxpayer Advocate Service (TAS) received 87 cases involving earnings arising from stolen or fabricated SSNs. TAS received 133 such cases in FY 2003.
[34] TIGTA Report, supra note 26, at 32.
[35]IRC § 6103(h)(1) authorizes inspection and disclosure of tax returns and return information to Treasury officials and employees “whose official duties require such inspection or disclosure for tax administration purposes.” The Treasury Inspector General for Tax Administration is authorized “to conduct and supervise audits and investigations relating to the programs and operations of” the Internal Revenue Service in order “(A) to promote economy, efficiency, and effectiveness in the administration of, and (B) to prevent and detect fraud and abuse in”, the programs and operations of the Internal Revenue Service. Inspector General Act of 1978, 5 U.S.C. § 2 Appendix 3 (1998). TIGTA employees are subject to the restrictions of IRC § 6103(h) and (i). TIGTA employees cannot use their authority to audit and inspect aspects of tax administration as a means to discover and indirectly “refer” potential nontax criminal acts that would otherwise be prohibited under IRC § 6103. In the context of undocumented workers who are trying to comply with the tax laws, such actions on the part of TIGTA employees can actively undermine tax administration.
[36] IRC § 6103(i)(1).
[37] IRC § 6103(i)(2).
[38] IRC § 6103(i)(3)(A).
[39] When I was a director of a Low Income Taxpayer Clinic, here is how I would explain the ITIN rules to clients or audiences in outreach sessions to allay fears expressed by undocumented workers about the risks of filing their tax returns. In general, for the Department of Justice or another Federal agency to obtain tax returns or tax return information for purposes of a non-tax administration criminal investigation or proceeding, it must obtain an order from a Federal judge. Thus, in general, the client should be concerned that his tax information could be shared with another Federal agency (for example, immigration) if he were already or were likely to be placed under investigation for some nontax violation of law. For many undocumented taxpayers, this risk is outweighed by the strong incentive for and benefits of being compliant with the tax laws – that is, the ability to prove good moral character for immigration purposes by filing tax returns.