Retired IRS Special Agent: Here’s How to Get Mexico to Pay for the Wall
The Washington Post published an article Friday reporting that American taxpayers will have to pay for the promised wall between Mexico and the southern U.S. border, despite President-elect Donald Trump’s earlier claims that Mexico would be forced to fund the project.
There is still a way that Mexico could pay for the wall, however.
How Illegal Immigrants Receive Hefty Tax Returns
Congress, through the Internal Revenue Code (IRC), allows illegal immigrants working in the United States to claim their relatives living in Mexico and Canada, or illegally in the United States, as dependents on their tax return, thus reducing their tax liability. Amending the IRC to allow only U.S. Citizens (USC’s) or legal residents to be claimed as dependents would likely generate billions of dollars in additional tax revenue which could then be earmarked for a border fence between Mexico and the United States.
Here’s how the system current works. An illegal immigrant living in the United States can file a Form W-7 through an “Accepting Agent” (usually a return preparer) with the IRS to get an Individual Tax Identification Number (ITIN). He then can get ITIN’s for his relatives living in Mexico or illegally in the United States.
When he files his Form 1040, he slaps his ITIN on the front of the return and attaches his Form W-2 showing his wages. The Form W-2 usually shows the social security number that he has purchased, stolen, or borrowed because he was ineligible to work in the Unites States. He then loads up his return with the ITIN’s of his dependents either living illegally in the United States or residing in Mexico. These dependents don’t have to be the taxpayer’s children. They can be his parents, uncles, and distant relatives such as nieces and nephews. The taxpayer’s 2016 taxable income is reduced by $4,050 for each dependent.
Crazy True Story
Here’s a true example. IRS special agents raided a one-person tax preparation business in a small Wisconsin town in 2014. Over the course of seven years, the owner filed 10,437 applications for ITIN’s on behalf of her clients. From the 2011 through 2014 filing season, her clients racked up over $34 million in refunds from the 9,489 returns she filed with the IRS. Her clients received an average refund of $3,509 even though 69 percent of the listed an ITIN holder as the primary taxpayer and about 75 percent of the claimed dependents had ITIN’s.
The IRS estimates that the Tax Gap (the amount of tax revenue that should be collected but isn’t) stands at $468 billion per year.
Translated into English, this means that 69 percent of her taxpayers were illegal immigrants working in the United States who got an annual check for about $3,600 from Uncle Sam after claiming other illegals (or relatives in either Mexico or Canada) as dependents. During an undercover operation, this return preparer counseled her client (the conversation was conducted in Spanish) to find children in Mexico to claim so he could get a tax refund instead of owing money to the IRS.
Now, matters are getting worse. Illegal immigrants who want to claim bogus dependents operate on the honor system because Congress decimated the IRS’s enforcement budget. This move was made in response, I believe, to former IRS director Lois Lerner’s pleading of the 5th, lost IRS emails, crashed IRS hard drives, a few million dollars spent on a Disney Land boondoggle for IRS management, and videos showing high ranking IRS executives practicing a line dance or parodying a Star Trek episode. (Note that they mix the bridge of the original Star Trek with the Next Generation uniforms. Atrocious.)
The IRS does not publish statistics on the tax revenue lost by allowing illegal immigrants to claim other illegal immigrants, or people residing in Mexico, as dependents. However, the example provided above shows that just one return preparer can cost the Treasury $34 million in a few short years. What we do know is that the IRS estimates that the Tax Gap (the amount of tax revenue that should be collected but isn’t) stands at $468 billion per year.
If President-Elect Trump wants Mexico to pay for the wall, I suggest he sign a revision of the Tax Code which eliminates the dependency exemption for persons residing in Mexico and illegal immigrants from Mexico residing in the United States. Doing so would both fulfill a campaign promise and reduce the Tax Gap.
By the way, the return preparer in my example was never indicted, though hope springs eternal.
Rob Warren is Clinical Assistant Professor of Accounting at The Catholic University of America’s Busch School of Business and Economics in Washington, D.C. He spent 25 years with the Internal Revenue Service investigating complex schemes involving tax fraud, money laundering, currency structuring and related financial crimes.