Illegal Workers Used Tax Credit to Pocket $4.2 Billion, Audit Shows

Talk about a tax loophole.

Undocumented workers collected $4.2 billion in a certain tax credit last year, up from less than $1 billion five years ago, according to a new audit.

The report from the Treasury Inspector General for Tax Administration looked only at a tax benefit known as the Additional Child Tax Credit, a refundable credit meant for working families. The audit found that as a result of vague U.S. law — as well as an expansion of the tax credit in stimulus legislation and other measures — the number of illegal workers collecting the money has skyrocketed.

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The inspector general’s office expressed concern about the trend and urged the IRS and Treasury Department to determine once and for all whether that money should be paid out.

“The payment of federal funds through this tax benefit appears to provide an additional incentive for aliens to enter, reside and work in the United States without authorization, which contradicts federal law and policy to remove such incentives,” the report said.

The report highlighted a quirk in U.S. law. Even people who are not authorized to work are supposed to pay the IRS taxes on their income. Many of those people cannot obtain a Social Security number, so to facilitate this the IRS hands out what are known as Individual Taxpayer Identification Numbers — so illegal workers can file returns. However, in doing so many of those workers are claiming tax benefits like the Additional Child Tax Credit. For some, it’s a way of making even more money.

“Refundable credits can result in refunds even if no income tax is withheld or paid,” the report noted.

The Additional Child Tax Credit is an offshoot of another tax credit worth up to $1,000 per child. Restrictions for the tax credits were loosened in 2001, and eligibility was temporarily increased by the 2009 stimulus bill.

“As such, more taxpayers could claim the ACTC or claim a greater amount,” the report said. The inspector general’s office said 2.3 million undocumented filers claimed the credit in 2010, adding up to $4.2 billion worth of refunds.

Not all immigrants who are unauthorized to work are necessarily illegal immigrants. However, any legal immigrant who works without authorization would be in violation of his or her immigration status.

The report said that if the administration determines the credits should not be paid in the future, then the IRS needs the authority to stop them.

According to the audit, the IRS agreed with that recommendation.

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