As Americans struggle to file federal income taxes by April 15, millions of illegal immigrants, who have not paid a dime in tax, are lining their pockets with tax refunds. Three programs—the Earned Income Tax Credit (EITC), the Additional Child Tax Credit (ACTC), and the American Opportunity Tax Credit (AOTC)—make this possible; all three programs are administered by the Internal Revenue Service (IRS). They are designed to reduce taxes paid by low-income families with children, but they are “refundable” tax credits, meaning that if the amount of credit exceeds the filer’s tax payment, the government pays the difference in cash. For many illegals these programs represent a government check received without working, going to school, or having a child.
EITC is the oldest and most expensive refundable tax credit. Created in 1975 to offset the impact of Social Security taxes on poor families with children, EITC eligibility has expanded to include childless families and singles. Since 1979, the EITC credit has been available as an “advance,” allowing filers to receive their predicted credit in quarterly payments throughout the preceding year, and settle up with the IRS when the amount they are actually eligible for becomes known.1 In 2009, the Obama administration expanded the EITC by creating a “third tier” for families with three or more children, allowing them to receive up to $700 more than they otherwise would.
EITC payments have grown every year over the past three decades; the number of tax returns claiming the credit is 4.4 times larger now than it was thirty years ago:
From 1985 to 2015, EITC payments grew from $2.1 billion to $68.5 billion, up by an eye-popping 3,162 percent, while federal income tax revenues rose by a comparatively tame 378 percent. Similarly, the number of tax returns claiming EITC increased by 339 percent, nearly ten times the 36 percent increase in total federal income tax returns over that period.
Entitlement reform is essential if we are serious about cutting the deficit. Over the past thirty years, reductions in Medicare, Medicaid, and other “untouchable” entitlements have been proposed. More recently, Obamacare—along with the tax credits enacted to help low-income people pay the higher medical insurance premiums, has been targeted for extinction. But the EITC? No way. Neither party has shown any interest in cutting the tax credit.
This is a chronic problem. For decades EITC
spending has grown faster than spending for better-known entitlement programs:
In 1980, the refundable part of EITC spending (i.e., the amount paid over and above taxes paid by recipients) was $1.275 billion. By 2016 the refundable part had grown to $60.6 billion, a 47-fold increase, as shown in the above table. Over this period Social Security spending increased 7.8-fold, Medicare rose 20-fold, Medicaid grew 26-fold, and all entitlements grew 10-fold.
While the Trump administration obsesses over Obamacare, EITC remains in the shadows. One reason for its relative anonymity: EITC is part of the income tax code. (That’s why we are releasing this update prior to the Tax Day 2018.) The tax code is vast. It contains hundreds of deductions, allowances, and credits, of which EITC is one of the most complex, generous—and abused. But the credit is not subject to the congressional budget appropriation process, so the scandals and fraud associated with it are rarely discussed publicly.
Technically, illegal aliens who do not have Social Security numbers are not eligible to collect the EITC. A constellation of factors, including identity theft, incompetent accountants, aggressive tax preparation services, and pro-immigration activists, have effectively neutralized this prohibition.
The IRS itself is complicit. Each year the tax collection agency mails millions of EITC refunds to households that claim children and sufficiently low income on their 1040 return. In 2018, these refunds can be as high as $6,318. No interviews. No eligibility checks. No effort to ascertain whether the person filing the return is really working, or simply using a Social Security number stolen from someone who is.
A 2017 audit by the Treasury Department’s Inspector General for Tax Administration (TIGTA) found the tax agency unable to fulfill this mission:
IRS processes are not sufficient to identify all employment identity theft victims. For example, 497,248 victims, who did not have a tax account in Processing Year 2015, were not identified even though identity thieves electronically filed tax returns with evidence that they used the victims’ Social Security Numbers (SSN) to gain employment. For another 60,823 victims, who have a tax account, the IRS did not update their account with an employment identity theft marker. In addition, IRS processes do not identify employment identity theft when processing paper returns…2
Claiming fictitious children is a major source of EITC fraud. One inspector general’s report found, for example, that 2,137 returns were filed from a single address in Lansing, Michigan, each claiming children that lived at that address. The IRS was asleep at the switch: this one incident triggered $3.3 million in refunds before the fraud was detected.3
TIGTA identified seven specific actions that the IRS needed to take in order to weed out fraudulent tax returns and safeguard Social Security card-holders from identity theft. IRS management rejected five of the seven ideas. In a blog post Dan Cadman, a retired ICE/INS expert on immigration law enforcement, writes: “This is beyond disturbing; it beggars belief. Why would they not accept the TIGTA’s recommendations?”
By way of explanation , Cadman notes that the IRS “…is an agency that, incredibly, harbors employees who are themselves tax scofflaws.” He implies, in effect, that self-interest plays a role in IRS management’s turning a blind eye toward tax fraud, adding: “If this is not the classic definition of a rogue executive branch agency, I don’t know what is.”4
On top of everything, Barack Obama’s de facto amnesty extended EITC eligibility to immigrant groups most likely to qualify for the credit: the so-called Dreamers and their parents. Forty percent of both Mexican and Honduran households qualify for the tax credit, as do forty-two percent of households headed by a Guatemalan. Those rates are nearly twice the EITC eligibility rate for all immigrants (23.5 percent) and four times the eligibility rate for natives (10.5 percent).5
Instead of curtailing EITC fraud, the Obama administration fueled an entirely new component—one that the Trump Administration has yet to squash. Nearly one-quarter (24.8 percent) of all EITC payments, worth an estimated $16.8 billion, were issued improperly in 2015, according to recent congressional testimony.6
Fraudulent payments are, of course, a long-standing problem that affects every federal program. Advocates for the poor insist that EITC fraud is unfairly singled out by those who would reduce all payments to deserving poor. But the size and intensity of EITC fraud are demonstrably larger than for the fraud in other federal programs. We know this from an annual survey conducted by the Government Accountability Office (GAO).
The Improper Payments Act of 2002 requires agencies to identify programs and activities susceptible to fraudulent payments, estimate the amount of such payments, and report on actions they have undertaken to reduce them. In 2016 GAO reviewed 22 such reports, covering 112 government programs. Improper payments totaled a stunning $144.3 billion in 2016, up from $107.1 billion in 2012.7
More than two-thirds of this waste stems from three mega-programs: Medicare, Medicaid, and the Earned Income Tax Credit. As for the improper payment rate, EITC is by far the worst:
Yet politicians from Paul Ryan to Michael Bloomberg tout the EITC as the one anti-poverty program that works. Their enthusiasm stems from the perception that EITC only helps the working poor—especially families with children. Unlike traditional welfare programs that reduce benefits as a recipient’s private earnings go up, the EITC credit goes up, increasing work incentives for low-income individuals. Only as income approaches the poverty level are EITC payments phased out.
In truth, the EITC phase-out creates work disincentives that are every bit as damaging as those in traditional welfare. At income as low as $18,343, every extra dollar earned takes 21 cents away from a family’s EITC benefit.8 To avoid this, many EITC claimants stay in dead-end jobs interminably. (There is no time limit placed on EITC eligibility.) Equally perverse is the marriage disincentive: If a single parent gets married, the new spouse’s income can disqualify the new household from receiving any EITC benefit. The credit becomes, in effect, a marriage tax.
These negatives notwithstanding, support for the credit extends beyond the Beltway: In 2017 29 states plus the District of Columbia had their own EITCs.9 These state plans generally mimic the federal structure on a smaller scale, with individuals receiving a state credit equal to a fixed percentage—generally between 15 and 30 percent—of what they receive from the federal credit. A few small EITCs have been enacted by local governments—in San Francisco, New York City, and Montgomery County, Maryland.
Washington’s love affair with EITC has allowed the minimum wage to decline in real value. Native workers have suffered as a result. So have labor unions. In effect, EITC subsidizes employers who hire low-wage immigrants and reject equally qualified natives. No one should be surprised, therefore, that Walmart, the U.S. Chamber of Commerce, and most liberal activist groups, are major EITC supporters.
For low-income families the tax refund is often the largest sum of money received during the year. Most receive it after filing income taxes. But some need the money immediately and they can get it—for a price. A niche financial sector thrives by lending EITC recipients immediate cash in return for a hefty chunk of their credit check. The cost to the poor of these so-called Refund Anticipation Loans (RALs) has been estimated at 6 percent of the entire EITC program.
Has EITC lived up to its hype? In answering this, consider the following:
• EITC originated as an anti-poverty program; the number of tax returns claiming EITC refunds more than doubled (+123 percent) from 1990 to 2015, while the poverty population rose 28 percent.
• EITC benefits rise sharply with parenthood; yet poverty rates for families with children have risen faster than those for childless families since the credit was created.
• EITC’s payment structure is supposedly pro-family; yet a larger share of poor children lives in single-parent households now than when the credit started.
Clearly, the much-heralded work incentives embedded in EITC have not worked as advertised. In fact, EITC appears to be a textbook case of unintended consequences.
A related tax credit, the Additional Child Tax Credit (ACTC), is explicitly available to illegal aliens.
ACTC is the refundable part of the Child Tax Credit (CTC), a credit dating from the Taxpayer Relief Act of 1997. Initially ACTC provided a maximum payment of $500 per child. President George W. Bush’s tax cuts of 2001 and 2003 doubled the maximum ACTC payment to $1,000 per child, and extended ACTC eligibility to families with one or two children. Those expansions were renewed by Obama in 2009—but were slated to expire in 2013. The American Taxpayer Relief Act of 2012, enacted in response to the “fiscal cliff” emergency on New Year’s Day 2013, made the expansions permanent.10 As a result, ACTC payments skyrocketed from $1 billion in tax year 2001 to $27 billion in tax year 2015.11 The share of tax filers receiving the payment increased from 1 percent to 18 percent.
Most families with children eligible for EITC are also eligible for the ACTC. Unlike EITC benefits, which max out at three children, ACTC payments increase for every child in a taxpayer’s family. Since larger families generally have more income than smaller families, ACTC payments are less concentrated on low-income groups than EITC payments. More than 58 percent go to taxpayers making more than $20,000.
More importantly, a large share of ACTC refunds go to illegal aliens who are not eligible to work in the United States. Most of these folks file tax returns with an Individual Taxpayer Identification Number (ITIN) because they cannot legitimately obtain a Social Security number. They claim dependent children who do not exist, are in a foreign country, are over-aged (the child must be under age 17), or are illegal aliens.12 This occurs despite the explicit statements in the 1996 Clinton welfare reform law (PRWOA, or Personal Responsibility and Work Opportunity Act) that “[I]t is a compelling government interest to remove the incentive for illegal immigration provided by the availability of public benefits,” and illegal aliens are “not eligible for any Federal public benefit.”13
IRS is part of the Treasury Department. The Treasury Department’s Inspector General for Tax Administration (TIGTA) is the individual charged with IRS oversight—i.e., determining whether the tax collection agency’s policies are legal and ethical. In a 2011 report the TIGTA summarized IRS policy regarding the ACTC and illegal aliens as follows:
“Many individuals who are not authorized to work in the United States, and thus not eligible to obtain a Social Security Number (SSN) for employment,earn income in the United States.The Internal Revenue Service (IRS) provides such individuals with an Individual Taxpayer Identification Number (ITIN) to facilitate their filing of tax returns.Although the law prohibits aliens residing without authorization in the United States from receiving most Federal public benefits, an increasing number of these individuals are filing tax returns claiming the Additional Child Tax Credit (ACTC), a refundable tax credit intended for working families.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.14
Jan Ting, a professor of law at Temple University, sees the IRS as knowingly enabling this fraud:
In light of a decision by a U.S. Court of Appeals that the child tax credit is a ‘public assistance benefit’, it should be hard if not impossible for the IRS to justify continuation of its implicit position that the credit is not a ‘public benefit.’ Nevertheless, the likelihood that the IRS will abide by the appellate court’s decision must be weighed against its self-evident determination to frustrate the intent of Congress, as expressed in the PRWOA, to ‘remove the incentive for illegal immigration provided by the availability of public benefits.’15
The TIGTA report presented data showing ACTC rapidly becoming a program for individuals not eligible to work in the U.S.—i.e., illegal aliens:
As seen in the table, nearly three-quarters (72 percent) of all tax returns filed by illegal aliens claimed the ACTC in 2010. These folks paid no income taxes, yet collected an aggregate $4.2 billion in refundable ACTC tax credits that year. Over the five-year period, 2005 to 2010, the number of aliens claiming the credit rose nearly three-fold, and the dollar amount they received grew more than four-fold.
While the Great Recession undoubtedly contributed to increased ACTC usage, Barack Obama’s economic recovery plan is also culpable. The American Recovery and Reinvestment Act of 2009 increased ACTC eligibility and enabled some qualifiers to claim a greater amount. In addition, there was an increase in the number of filers who filed retroactively—for back years as well as the current year—in order to maximize their ACTC refund. In 2010, for example, about 238,000 ITIN filers submitted multi-year returns claiming more than $1 billion in ACTC money.16
At a superficial level, there is some good news to report: ACTC refund payments peaked in tax year 2011, and have declined every year since then, while the EITC, which at least tries to avoid sending benefits to illegals, has increased each year:
From 2011 to 2015 total ACTC refunds declined by 7.0 percent, from $28.6 billion to $26.6 billion, while EITC payments rose by 8.9 percent, from $62.9 billion to $68.5 billion. Put differently, in 2011 total ACTC refunds were about 45 percent the size of EITC refunds; by 2015 (latest available data) they slipped to 39 percent of EITC payments. It should be noted that these figures reflect all refund payments, those received by illegal aliens filing with ITINs as well as those received by U.S. citizens filing with valid Social Security numbers.
Another piece of good news, which may explain some of the decline in ACTC outlays noted above, is that the IRS has tightened its rules governing the issuance of ITINs. ITINs issued prior to 2013 were valid for a period of five years. Today such numbers must be applied for annually.17
The new regulation appears to have had a chilling effect on those who fraudulently secured ITINs in the past. IRS data show a significant drop in ITIN applications since 2013. Unfortunately, the percentage of applications rejected by IRS has also dropped:
David North, an internationally recognized expert on immigration policy, suggests that the downward trend in rejection rates “may relate to a better mix of applications, to lower standards on the part of the IRS, or to some combination of the two.”18
The IRS data in this table are not publicly available. They were pried out of the IRS via a Freedom of Information Act Request by Ian Smith of the Immigration Law Reform Institute. The data relate only to the number of ITINs issued, not the type of tax credits or the dollar amounts they secured. We can only hope that the Trump team will staff the IRS with individuals willing to release this information.
The American Opportunity Tax Credit
The AOTC was created by the American Recovery and Reinvestment Act of 2009 as a modification of the nonrefundable Hope Credit, a Clinton-era program. The credit covers up to $1,000 of payments for tuition, college fees, and course materials, and is limited to the first four years of postsecondary education. As with the EITC and ACTC, the credit is reduced when income rises above specified threshold levels. Unlike those credits, AOTC is available to taxpayers with income well above poverty level: In 2014 single filers with income as high as $90,000, and joint returns with up to $180,000 in gross income, were eligible for AOTC refund checks.
The TIGTA found widespread AOTC fraud, with many filers claiming the credit for students enrolled for more than four years, students who went to non-accredited institutions, and those attending school less than half-time. Treasury also found that 250 inmates in correctional facilities have claimed the credits as students.19 When confronted with this evidence of AOTC fraud, the Obama administration responded by simply legalizing the abuses identified in the audit:
“Currently students must be at least half-time to qualify for the AOTC, and families can claim the credit for no more than four years. Under the President’s plan, part-time students would be eligible for a $1,250 AOTC (up to $750 refundable) and all eligible students would be able to claim the AOTC for up to five-years,” the 2015 tax plan said.20
While Obama’s proposals did not make it into law, the AOTC remains the most lucrative education tax break of all. Households that pay no taxes get can get a check from the federal government for up to $1,000 for four years. For those who pay taxes, the credit is as much as $2,500 per year for up to $4,000 in tuition.21
In 2015 these three tax programs paid a combined $102 billion to more than 56 million tax filers.22 IRS estimates that nearly one-quarter (24.6 percent) of all payments made under these programs that year were “improper”—defined as a payment that should not have been made, was made in an incorrect amount, or was made to an ineligible recipient.
The risks inherent in refundable tax credits are highlighted in 2017 congressional testimony by the Treasury Inspector General for Tax Administration:
“Although refundable credits provide benefits to individuals, the unintended consequences of these credits is that they can result in the issuance of improper payments and can be the targets of unscrupulous individuals who file erroneous claims. Refundable credits can result in tax refunds even if no income tax is withheld or paid; that is, they can exceed an individual’s tax liability. Consequently, they pose a significant risk as an avenue for those seeking to defraud the Government. Whereas, nonrefundable tax credits are limited to the amount of an individual’s income tax liability, refundable tax credits do not have such a limitation.”23
Everybody’s Doing It?
Fraudulent payments are, of course, a longstanding problem that affects every federal program. Advocates for the poor insist that EITC fraud is unfairly singled out by those who would reduce all payments to deserving poor. But the size and intensity of EITC fraud is demonstrably larger than that in other federal programs. We know this from an annual survey conducted by the Government Accountability Office (GAO).
The Improper Payments Act of 2002 requires agencies to identify programs and activities susceptible to fraudulent payments, estimate the amount of such payments, and report on actions they have undertaken to reduce them. In 2016 GAO reviewed 22 such reports, covering 112 government programs. Improper payments totaled a stunning $144.3 billion in 2016, up from $107.1 billion in 2012.24
More than two-thirds of this waste stems from three mega programs: Medicare, Medicaid, and the Earned Income Tax Credit. As to the rate of improper payments, EITC is by far the worst:
For the record, neither the ACTC nor AOTC submitted Improper Payment reports in FY2016. ■
1. GAO , Refundable Tax Credits, May 2016.
2. Dan Cadman, Illicitly Providing Tax Benefits to Illegal Aliens: It’s Time to Rein in the Rogue IRS, (CIS), July 3, 2017.
3. Ernest Istook, Needed: Watchdogs over waste, misguided payments, Washington Times, April 8, 2015.
4. Cadman, op. cit .
5. Steven Camarota and Karen Zeigler , Immigrants in the United States, CIS, October 2016, Table 12.
6. J. Russell George, Treasury Inspector General for Tax Administration, Duplication, Waste, and Fraud in Federal Programs, Testimony before the Committee on Homeland Security and Governmental Affairs, U.S. Senate, April 26, 2017.
7. House Budget Committee, Building a Better America, https://budget.house.gov/wp-content/uploads/2017/07/Building-a-Better-America-PDF-1.pdf, p. 51.
8. The Tax Policy Center, http://www.taxpolicycenter.org/publications/refundable-credits-earned-income-tax-credit-and-child-tax-credit/full
9. Center on Budget and Policy Priorities, 2017.
10. Center on Budget and Policy Priorities, Policy Basics: The Child Tax Credit, February 1, 2013.
11. IRS, Statistics of Income, Tax Statistics Publication 1304, Table A.
12. David North, IRS Should Say Immediately: Only Genuine SSNs Produce Refunds, CIS, January 17, 2017.
13. Jan Ting, IRS Ignores Appeals Court Decision: Continues Paying “Child Tax Credits” to Illegal Aliens, Center for Immigration Studies, June 22, 2017.
15. Jan Ting, op. cit.
16. Peter A. Schulkin , Illegal Immigrants Receive Billions of Dollars More from the IRS than They Pay in, David North, Center for Immigration Studies, September 16, 2011.
17. David North , Good News/Bad News on IRS Program that Pays Illegals to Stay in the U.S., CIS, October 4, 2016.
19. Bill McMorris,
Program Leads to Poten-tial Billion Dollar Fraud, Freebeacon.com,
May 6, 2015.
23. J. Russell George, op. cit.
24. House Budget Committee, Building a Better America, https://budget.house.gov/wp-content/uploads/2017/07/Building-a-Better-America-PDF-1.pdf, p. 51.