How did the IRS manage to pay out $7 billion in improper child tax credits in the tax years, 2004-2007? That's the question that the Treasury Inspector General for Tax Administration (TIGTA) wanted to answer.
After an investigation, a report from TIGTA shows that the problem lies mostly in the inappropriate issuance of individual taxpayer identification numbers (ITINs). ITINs are assigned to people who are not eligible for Social Security numbers, but who need to comply with tax laws. ITINs are not valid for employment purposes. Even so, in 2006 nearly 293,000 employers allowed individuals without proper identification to work, and issued over 790,000 W-2s using only ITINs. The wages reported on these W-2s equaled more than $9.5 billion.
In tax year 2007, the TIGTA report shows that about two-thirds of individuals who filed tax returns using ITINs received the Additional Child Tax Credit (which is a refundable credit that filers with no tax liability can receive). That's more than 1.2 million claims, totaling nearly $1.8 billion in improper credits.
The ability to request and receive these improper payments is a clear weakness in the system, says TIGTA.
"As it now stands, the payment of federal funds through this tax benefit appears to provide an additional incentive for aliens to enter, reside, and work in the U.S. without authorization, which contradicts federal law and policy to remove such incentives."
Based on this information, the Inspector General recommends that the Commissioner of the IRS Wage and Investment Division in coordination with the Social Security Administration needs to develop methods for sorting out individuals who are using ITINs for employment. While the IRS states that they are working on this problem, the TIGTA report concluded that the tax agency's efforts so far have been inadequate at best.
"Although the IRS has data available to identify these individuals and employers, no significant actions are taken to address the noncompliance."
TIGTA's conclusion that too little is being done is evident in the fact that the numbers of foreign workers who are taking advantage of the child credits improperly is rapidly increasing. The report shows that in 2004, about 626,000 foreign workers without SSNs, who did not make enough to pay federal taxes, improperly claimed child tax credits. These credits totaled about $778 million. As noted earlier, by 2007, the number of credits claimed had jumped to 1.2 million, for a total of nearly $1.8 billion.
The tax agency also needs to tighten controls on information that is input into their system, both from paper and electronic filing, to ensure accuracy. TIGTA observed that incomplete or inaccurate information is being loaded into the system, such as tax returns filed with an individual's ITIN accompanied by a W-2 that bears a Social Security number that does not belong to the taxpayer. Part of the problem with faulty information arises from tax software that auto-populates the SSN field with an ITIN instead of rejecting these returns.
Other recommendations from TIGTA include making sure that the criterion for receiving the Child Tax Credit and Additional Child Tax Credit are met on tax returns that claim those credits. There needs to be clarification as to whether the credits can be paid to filers who only have ITINs, rather than SSNs, and whether the IRS has the authority to deny payment of the credits to filers who do not meet this requirement.
The IRS has agreed to take the following corrective actions: they will work with tax software companies to limit the auto-populate feature within tax programs. And, they will work with their Tax Policy office to consider changing to law to limit child tax credit claims to filers who present valid SSNs.