I. EITC and ACTC Fraud

By Edwin S. Rubenstein
Published in The Social Contract
Volume 28, Number 2 (Winter 2018)
Issue theme: "Taxpayers Fund Illegal Aliens - The Earned Income Tax Credit Scam"
http://www.thesocialcontract.com/artman2/publish/tsc_28_2/tsc-28-2-eitc-actc-fraud.shtml




After creating the false Forms W-2, [Pepe] Anetipa then transferred the information onto tax returns on which she claimed her clients were owed significant refunds. In order to increase the refunds, Anetipa also encouraged her clients to find dependents to include on their returns. The addition of dependents allowed taxpayers to claim that they were entitled to the Earned Income Tax Credit (EITC) even though they were in fact entitled to $0 from the United States Treasury….the IRS ultimately linked Anetipa to the preparation and filing of hundreds of false returns that resulted in the payment of approximately $2 million in false refunds….

—Department of Justice (DOJ) Press Release, November 17, 2015
https://www.justice.gov/usao-ak/pr/washington-woman-sentenced-2-million-fraud-scheme


Kevin Kunlay Williams, aka Kunlay Sodipo, a Nigerian citizen, [is charged] with mail fraud, aggravated identity theft, voter fraud, illegal reentry and being a felon in possession of a firearm. According to the indictment, Williams and others stole public school employees’ IDs from a payroll company and used them to electronically file more than 2000 fraudulent federal income tax returns seeking more than $12 million in refunds. He also allegedly stole several Electronic Filing Identification Numbers (EFINs) that he used to secure bank products allowing him to print refund checks and direct the Internal Revenue Service (IRS) to send refunds to prepaid debit cards.

—DOJ Press Release, March 29, 2017
https://www.justice.gov/opa/pr/missouri-man-indicted-12-million-tax-refund-fraud-voter-fraud-illegal-reentry-and-felon


A federal court in Orlando, Florida, has permanently barred Jason Stinson, of Longwood, Florida, from preparing federal tax returns…. The court found that Stinson falsified information on his customers’ returns to claim the maximum EITC amount by: “claiming bogus dependents, fabricating unreimbursed employee expenses and charitable contributions, and fabricating business income and expenses.” The court found that in many instances Stinson and his preparers fraudulently lowered a customer’s taxable income by claiming false unreimbursed business expenses in large amounts, at times more than half of what the customer earned in a given year....

—DOJ Press Release, March 8, 2017
https://www.justice.gov/usao-ndal/pr/court-orders-return-preparation-business-owner-pay-nearly-950000-united-states


 

 

Technically, EITC is available only to low-income workers eligible to work in the United States. In practice, Social Security number (SSN) theft, counterfeit W-2s, and other scams nullify such restrictions. Shady tax preparation services enable illegal aliens to maximize the credit by fudging income and claiming non-existent dependents.

Most illegal immigrants have fraudulent Social Security cards, according to Federal Security officials. Their favorite target: young children. SSNs assigned to infants are stolen from medical paperwork and used to file returns. The fraud can go undetected until the child looks for a job as a teenager.1

The IRS does little to verify the validity of SSNs on tax returns, the existence of immigrant children, or to ascertain that they have lived with the taxpayer for more than six months of the year as required by law. Illegals still claim all kinds of dependents—including some in Mexico. Prompted by tax preparation services, illegal alien husbands and wives often file separate returns on which both claim the same kids.

EITC outreach groups—most prominently the Center for Budget and Policy Priorities (CBPP)—offer tips as to how illegals can receive EITC payments for years in which they did not have a valid Social Security number. As a result, some studies have found that illegal aliens receive EITC at greater rates than their legal counterparts.

The incentive to cheat is huge: a worker with two children and income below $45,007 can receive an EITC refund up to $5,616 in 2018. A related tax credit—the Additional Child Tax Credit (ACTC)—pays this person $1,000 for each additional child. For most illegal aliens, these refunds are the largest checks they receive all year.

The ACTC is available to illegals even if they do not have a valid Social Security number. All they need is an Individual Taxpayer Identification Number (ITIN)—which tax preparation services are happy to apply for on their behalf. And unlike the EITC, which maxes out at three children, ACTC payments go up for each additional child.

The IRS makes getting $1,000 per child easy. One IRS staffer told a TV reporter:

“We see the same docs photocopied and attached to different applications. It’s the same person, same photo, same address. I’ve seen the same birth certificate 12 times now in the past day. You see it all on an ITIN application...”2

When asked what he does with the applications, the IRS insider admitted

“If the document is there, process it.”

The same reporter tracked down an illegal alien:

One of the workers who was interviewed at his home in southern Indiana admitted his address was used this year to file income tax returns by four other undocumented workers who don’t even live there. Those four workers claimed 20 children live inside the one residence and, as a result, the IRS sent the illegal immigrants tax refunds totaling $29,608.

13 Investigates [news program] saw only one little girl who lives at that address (a small mobile home). We wondered about the 20 kids claimed as tax deductions?

“They don’t live here,” said the undocumented worker. “The other kids are in their country of origin, which is Mexico.”3

A TIGTA report from 2012 focused on massive mailings of approved ITINs and ITIN-related tax refunds to specific postal addresses. There were, for example, 23,984 tax refunds, claiming a combined $46,378,040 in refunds, sent to a single address in Atlanta, Georgia. Another tabulation showed that 15,769 ITINs were mailed to a single address in Phoenix.4

Cases where hundreds, or even thousands, of tax returns claiming children are mailed from the same address usually involve the ACTC. More often than not, the address is that of a tax preparation service that caters to illegal aliens. They procure ITINs from the IRS, pay for stolen SSNs for children (who may or may not exist), and coach their clients on income eligibility limits. The catch: customers must agree to have the refunds sent to the tax preparer’s office. This procedure is a win-win for illegal alien filers, who do not want the Feds to know their true whereabouts, and the tax preparer, who takes a hefty fee from the tax refund before disbursing the balance to his or her client.

In the (very unlikely) event that the IRS gets around to investigating the address in question, the pop-up office is long gone.

IRS tax forms do not ask the citizenship status of filers; therefore, the agency does not know how many illegal aliens receive refundable tax credits. Private think tanks, however, have estimated EITC and ACTC usage of immigrants born in countries known to send a disproportionate number of illegal aliens to the U.S.

The Center for Immigration Studies (CIS) examined welfare recipiency rates among immigrants in a 2016 report. They found that immigrants in general, and Mexican immigrants in particular, use major means-tested program at higher rates than natives.

EITC stands out as the program most likely to be received by immigrant households from Mexico:

tsc-28-2-rubenstein-8-table-recipient-rates.png


Households headed by Mexican immigrants are more than three times as likely to receive EITC than households headed by native-born Americans. For ACTC, the tax credit explicitly available to illegal aliens, the eligibility ratio was nearly five-to-one (33.0 percent of households headed by a Mexican versus 6.9 percent of households headed by a native.)

Moreover, immigrants receive larger average benefit payments than natives. For EITC, average payment amounts in 1999 were as follows: Natives $1,456; All immigrants, $1,693; Mexican immigrants, $1,887.5 This is because EITC payments, like payments for public assistance and food stamps, typically reflect the number of people in the households. Because immigrant households are larger on average (primarily because of higher fertility), the size of their average payment is also larger.

All nationalities and ethnicities are more likely to receive tax credit refunds than cash welfare or housing subsidies. This reflects the relative ease with which potential participants can access these programs. For example, local welfare offices typically require face-to-face interviews before individuals can receive benefits. Traditional office hours—8:00 AM to 5:00 PM—pose a barrier to potential applicants who work and would have to take time off to apply.

By comparison, getting an EITC or ACTC refund check is relatively easy. Tax returns showing income in the eligible range can receive tax credit refunds as early as February 15, the date the IRS is now required to hold refunds claiming the EITC and ACTC. It had been January 31, but was pushed back to give the IRS more time to compare income reported on tax returns with income employers reported on W-2 forms sent to the Social Security Administration. Despite this extension, more than half (58 percent) of refunds claiming these tax credits are sent without income verification. The problem is especially acute for returns filed electronically6

The bottom line: Only persons whose employment is not reported to the IRS (i.e., they work off the books). or who do not file an income tax return, are shut out completely from refundable tax credits.


EITC RECIPIENCY BY STATE

Further evidence of a link between EITC and illegal aliens is seen in state data. States with large illegal alien populations have above average fractions of federal tax returns claiming the credit.

The positive correlation is evident in the table:

tsc-28-2-rubenstein-9-table-illegal-aliens-state.gif

The table ranks the 15 states with the largest illegal alien populations on the share of state population composed of illegals. At the top is Nevada, where an estimated 7.2 percent of residents are illegal aliens. Texas ranks second, with 6.1 percent, while California, at 6.0 percent, is now third, although the state maintains a commanding lead in the number of illegal alien residents—2.35 million. At the other extreme are Massachusetts and North Carolina, where illegal aliens account for 3.1 percent and 3.4 percent of state populations, respectively.

EITC was claimed on 19.9 percent of tax returns filed by residents living in these 15 states, versus 18.8 percent of returns from residents living in other states. The average EITC benefit was also larger—$2,381 in the top 15 illegal alien venues against $2,332 in the rest of the country.

Zeroing in on top five states (Nevada, Texas, California, New Jersey, and Arizona), the recipiency rate differences are even more pronounced. Residents in those states claimed EITC on 20.3 percent of tax returns, versus 18.8 percent recipiency in the rest of the country.

Residents of the top five illegal alien states also received significantly larger benefits—an average $2,427—or 4.1 percent more than the $2,332 average in the rest of the country. The differential reflects, in part, the relatively large number of children in illegal immigrant households.

As discussed below, EITC benefits rise when children enter the picture. There is thus a strong incentive for low-income households—including illegals—to have children (anchor babies), or misrepresent their status as custodial parents, in order to qualify for larger EITC payments.


EITC FRAUD IN CONTEXT

According to Bernard Wasow of the Century Foundation:

The IRS estimates that a single type of illegal scheme—offshore sheltering of income—practiced by 505,000 taxpayers in 2000, resulted in tax losses of $20 billion to $40 billion. This one scheme, used by only a half million high-income evaders, cost the Treasury two to four times as much as the six million EITC noncompliers…7

Mr. Wasow has a point: The amount of federal tax dollars lost to EITC fraud is small compared to the amount lost from fraudulent tax evasion activities of middle and upper income Americans. These relationships are highlighted in the “Tax Gap” report issued periodically by the Internal Revenue Service.

The latest report, covering years 2008 to 2010, finds an average annual Tax Gap of $458 billion over that period, with $40 billion of it attributable to tax credits.8 A different set of numbers, in which improper EITC payments are broken out separately, puts the EITC-related tax gap at $16.8 billion. So the total tax gap is about 27 times larger than the amount lost from EITC fraud alone ($458 billion versus $16.8 billion).

But wait a minute: On average 141.9 million income tax returns were filed annually over the 2008 to 2010 period, and only 26.4 million of them claimed the EITC. So, on a per return basis, the difference between EITC fraud and other tax fraud is only about one-fifth as large as the aggregate dollar amounts indicate.

Even more telling is the percent of total tax liability each group fraudulently evades. From 2008 to 2010 U.S. taxpayers paid the federal government $2.038 trillion on time, a figure equal to 81.7 percent of their true average annual tax liability over that timeframe. This implies that the noncompliance rate for all federal taxes is 18.3 percent, or about one-third less than the 24.9 percent improper payment rate for EITC shown above.

Moreover, late payments and enforcement efforts such as IRS audits and collection activities (payment arrangements, liens, and other legal actions) will recover some of the tax gap. The IRS estimates these activities will eventually collect $52 billion of the unpaid 2008 to 2010 tax liability. By comparison, fraudulent EITC payments are rarely recovered.

It’s not that middle or upper income taxpayers are more honest than EITC recipients—though that may indeed be the case. Most of us simply cannot avoid paying taxes because of withholding. And most of us cannot “hide” income because employers report our wages and salaries and tips directly to the IRS through form W-2. Less than 1.5 percent of income subject to withholding is misreported on income tax returns.9

Skeptics still believe the tax code is tilted toward the rich, and that the EITC should be expanded to ease the burden on low-income workers. The data simply do not support this view:

tsc-28-2-rubenstein-10-chart-fed-income-tax-shares.png

In 1980 the richest 1 percent of taxpayers paid 19 percent of all federal income taxes; by 2008, their tax share doubled, to 38 percent, and in 2014 (latest available data) it was 39.5 percent. Over the same period the share paid by the bottom half of taxpayers fell sharply—to 2.8 percent in 2014 from 7.1 percent in 1980.

Average tax rates (tax as a percent of gross income) have declined for all taxpayers since the 1980s—thanks to the Reagan revolution. But the poorest half have been the biggest beneficiaries. Their average tax rate (taxes as a percent of Adjusted Gross Income) fell from 6.1 percent in 1980 to 3.5 percent in 2014. For the top 1 percent, the decline was more muted: from 34 percent in 1980 to 27 percent in 2014.

Bottom line: the tax system is far more progressive today than it was in 1980.

Most of the increase progressively reflects changes in tax rates and other policies designed to ease the burden on lower income taxpayers. Some of it, however, is unintended—the result of high rates of tax fraud among low-income taxpayers. EITC and its companion, the ACTC, are responsible for much of this trend. ■


Endnotes

1. http://transcripts.cnn.com/TRANSCRIPTS/0605/12/ldt.01.html

2. David North, Paying Illegals to Stay, the IRS Gives Out Billions Each Year, CIS, October 14, 2013.

3. Ibid. (source of quote)

4. Treasury Inspector General for Tax Administration, Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications, July 16, 2012. https://www.treasury.gov/tigta/auditreports/2012reports/201242081fr.html

5. Steven Camarota , Immigration From Mexico:
Assessing the Impact on the United States
, CIS, July 2001.

6. GAO, 2017 Filing Season: New Wage Verification Process Holds Promise but IRS Faces Implementation Challenges, April 26, 2017.

7. Bernard Wasow, Earned Income Tax Credit: The Compliance Challenge, The Century Foundation. http://www.tcf.orgPublications/EconomicsInequality/EITC.pdf

8. IRS, Tax Gap Estimates for Tax Years 2008-2010, April 2016. https://www.irs.gov/pub/newsroom/tax%20gap%20estimates%20for%202008%20through%202010.pdf

9. IRS, Understanding the tax gap, March 2005.http://www.irs.gov/newsroom/article/0,,id=137246,00.html

About the author

Edwin S. Rubenstein, a regular contributor to The Social Contract, is president of ESR Research, economic consultants. As a journalist, Mr. Rubenstein was a contributing editor at Forbes and economics editor at National Review, where his “Right Data” column was featured for more than a decade. He is the author of  The Earned Income Tax Credit and Illegal Immigration: A Study in Fraud, Abuse, and Liberal Activism.

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