Steps Forward - and Back - on Tax Refunds for Illegals

By David North on November 8, 2017

There are provisions in the administration's long, long tax proposal that relate to illegal aliens and tax refunds. Subdued rapture is the appropriate reaction.

I approach this with the following thoughts in mind:

  1. It is not a good idea to pay illegal aliens tax refunds for non-existent or illegal alien children;
  2. More broadly, it is not a good idea to pay anyone tax refunds unless they can submit what appears to be a legitimate Social Security number for the worker;
  3. It is not a good idea to encourage illegals to marry (or co-file 1040s) with citizens so that the former can get tax benefits otherwise denied;
  4. It is not a good idea to ask Congress to reduce tax refunds for illegal aliens in a specific area in which a regulation change can do the same thing more quickly; and
  5. The tax code should not be adjusted to encourage the births of more children, specially in low-income families, regardless of immigration status.

Further, while I am reacting to one part of the proposal that I know deals with illegal aliens, there may well be others in the legislation not known to me.

The Trump administration's tax reform proposals, when examined carefully, seem to be right on the first two points, and dead wrong on the last three. (I am not enthusiastic about big tax breaks for the very rich, and the proposed abolition of the estate tax, but these are other issues.)

These thoughts came to mind after reading the following segment of HR 1, the proposed tax bill:

SEC. 1103. REFUNDABLE CREDIT PROGRAM INTEGRITY.

(a) SOCIAL SECURITY NUMBER REQUIRED TO CLAIM THE REFUNDABLE PORTION OF THE CHILD TAX CREDIT.—

(1) IN GENERAL.—Section 24(d), as amended by the preceding provisions of this Act, is amended by redesignating paragraph (5) as paragraph (4) and by adding at the end the following new paragraph:

(5) IDENTIFICATION REQUIREMENT.— '(A) IN GENERAL.—Paragraph (1) shall not apply to any taxpayer for any taxable year unless the taxpayer includes the taxpayer's social security number on the return of tax for such taxable year.

(B) JOINT RETURNS.—In the case of a joint return, the requirement of subparagraph (A) shall be treated as met if the social security number of either spouse is included on such return.

The proposal to increase the additional child tax credit (ACTC) from $1,000 to $1,600 can be found elsewhere in the bill.

Let's look at the five variables in turn:

  1. As background, currently the IRS interpretation of the law allows for the payment of ACTC benefits, but not other tax credits, for children who lack a Social Security number, but possess another IRS-generated number, the Individual Tax Identification Number (ITIN). The difference is that you have to be here legally to get the SSN. The result of this odd, apparently low-level, IRS decision is that the United States pays out about $4.2 billion a year in benefits to persons with ITINs; people, by definition, not eligible to work in the United States, according to a report done several years ago by my colleague Peter Schulkin. So demanding the SSN for ACTC benefits is a long overdue, good idea.
  2. This provision is puzzling, seemingly designed to make all taxpayers provide their Social Security numbers, which seems to have been IRS policy for a long time. It may serve some public purpose that is not clear to me, but it is certainly not harmful. It goes downhill from here.
  3. This allows tax refunds to be paid if either of the spouses has an SSN, which implies that if one is an illegal alien and the other is not, the earnings are covered by the legal one of the two. If this provision becomes well known it will encourage illegals to marry legal residents, or at least co-file 1040s with them to sanitize their earnings. This, in turn, will increase the amount of refunds paid to these families.
  4. The problem caused by refunds paid for persons with ITINs, which an inspector general for the Treasury Department said costs us $4.2 billion a year, relates to an in-house decision that ITINs are adequate for this purpose, as my colleague Jan Ting wrote recently. That pro-ITIN decision should be reversed by the IRS; if that could be done, then there would be no need to include such a provision in a big tax proposal that may or may not be approved.
  5. I am not sure that lifting the ACTC to $1,600 will be much of a factor in determining future birth rates, but it certainly can not discourage them. We have a large supply of people as it is; we don't need more of them.

Incidentally the adjective additional is meant to qualify the term tax credit, not the word child. There has been for decades a tax credit that cuts your taxes for having dependents, but a few years ago Congress added an additional benefit: a sum of up to $1,000 that a taxpayer can receive for a child — a bonus that comes to those who qualify even if they do not pay any net income taxes.

The existence of this credit causes many low-income families to file their 1040s very promptly each year because it gives them up to $1,000 for each child under the age of 16. The family must report $3,000 in earned income to qualify and there have been examples of people claiming that level of earned income who did not, in fact, earn that much.


I am grateful to my colleague Preston Huennekens for his assistance.

Topics: Tax Fraud