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What Is The American Matrix?
- by Paul Revere -- MEMORANDUM FOR COMMISSIONER ROSSOTTI (continuing saga)
The Internal Revenue Service’s Individual Taxpayer Identification Number Program Was Not Implemented in Accordance with Internal Revenue Code Regulations September 1999 Reference Number: 094505 This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document. Redaction Legend: 2a = Law Enforcement Criteria 2b = Law Enforcement Guideline(s) 2e = Law Enforcement Procedure(s) September 28, 1999 MEMORANDUM FOR COMMISSIONER ROSSOTTI FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner Deputy Inspector General for Audit SUBJECT: Final Audit Report - The Internal Revenue Service’s Individual Taxpayer Identification Number Program Was Not Implemented in Accordance with Internal Revenue Code Regulations This report presents the results of the subject audit report. In summary, the Internal Revenue Service (IRS) Tax Identification Number (ITIN) program implementation was reviewed for conflicts with laws and regulations; impact on other IRS programs; and operational effectiveness. ****2a,2b,2e****. Over 340,000 of the ITINs were issued to self-documented illegal aliens. Our concerns are whether: the information on illegal aliens should be shared with the Immigration and Naturalization Service; illegal aliens should be treated as residents for tax purposes; ITIN causes revenue protection issues; and, whether operational problems during the implementation were corrected. Recommendations were made to: bring legal issues to the attention of the Joint Committee on Taxation for the Confidentiality of Tax Information Study; bring to your attention the taxation of illegal aliens; implement revenue protection controls; and correct operational conditions. The IRS generally agrees with the report recommendations. The disclosure issue will be forwarded to the Joint Committee on Taxation. Likewise, the Assistant Commissioner (International) will discuss with you the taxation of illegal aliens as United States residents. However, the revenue protection actions are seen as needing legislative remedy. The Office of Audit disagrees that the IRS should not take any action on this recommendation. Subsequent to the issuance of the draft report, the Office of Audit determined that there were 180,662 Tax Year 1997 Form 1040 returns filed with the ITIN as the identifying number. The IRS needs to examine the overall Revenue Protection Strategy to ensure that returns with ITINs ****2a,2b,2e****. This could be done on a sample basis. The operational conditions are being addressed. Management’s comments have been incorporated into the report, where appropriate, and the full text of their comments is included as an appendix. Copies of this report are also being sent to IRS managers who are affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions, or your staff may call Parker Pearson, Acting Associate Inspector General for Audit (Small Business & Corporate Programs), at (202) 622-5955.
Executive Summary Objective and Scope Background Results The Internal Revenue Service’s Individual Taxpayer Identification Number Program Needs to Consider the Effect of Illegal Aliens on Disclosure and Tax Policy Issues Management Controls Did Not Ensure Effective Implementation of the Internal Revenue Service’s Individual Taxpayer Identification Number Program Taxpayer Identification Controls for Cross-Referencing Information Were Not Effective Over the Assignment of the Internal Revenue Service’s Individual Taxpayer Identification Numbers Returns Processing Controls Were Not Effective for Taxpayers Affected by the Internal Revenue Service’s Individual Taxpayer Identification Number Requirement Conclusion Appendix I - Detailed Objective, Scope, and Methodology Appendix II - Major Contributors to This Report Appendix III - Report Distribution List Appendix IV - Revenue Protection Concerns Appendix V - Glossary of Terms Appendix VI - Audit Memorandum - Individual Taxpayer Identification Numbers: Telephone Service Can Be Improved Appendix VII - Management Briefing #1 - Adequate Physical Security Was Not Provided over Original Documents Submitted by Persons Applying for the Individual Taxpayer Identification Number Appendix VIII - Management Briefing #2 - Processing of Forms W-7 During Implementation of the Individual Taxpayer Identification Number Program Needed Improvement Appendix IX - Management’s Response to the Draft Report The Internal Revenue Service (IRS) made a policy decision to issue IRS Individual Taxpayer Identification Numbers (ITINs) to illegal aliens so tax filing obligations could be met. This IRS policy, to "legalize" illegal aliens, seems counter-productive to the Immigration and Naturalization Service (INS) mission to identify illegal aliens and prevent unlawful alien entry. The ITIN Program was designed to improve nonresident alien compliance with tax laws. In 1994, the IRS conducted a study, based on the audit report entitled Review of Nonresident Alien Information Documents (Reference Number 041403, dated January 21, 1994), which showed significant compliance concerns with the $80 billion annual nonresident alien United States (U.S.) investment income. The ITIN Program permanently assigns a U.S. Tax Identification Number (TIN) to nonresident aliens. Information documents, showing individual taxpayers as recipients of dividends, interest, and other income, can then be matched to tax returns.
The IRS established ITIN regulations that require an alien person to provide sufficient documentation to prove both identity and foreign status. The ITIN Program, as implemented, ****2a,2b,2e****. We concluded that the majority of these persons were illegal aliens. Illegal alien presence in the U.S. is a congressional concern. Legislation in the Welfare Reform Act and the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 requires: Curtailing and/or eliminating welfare benefits. Cooperating among federal, state and local governments on illegal alien identification. Increasing border patrols to prevent unlawful alien entry. The ITIN Program adversely affects effective and efficient tax administration. Providing illegal aliens with valid TINs allows for certain tax advantages and increases the potential for fraud. Fraudulent or invalid dependent claims on tax returns provide additional tax deductions and access to certain tax credits. This will become an increasingly important factor with the addition of the child tax and education credits provided for in the Taxpayer Relief Act of 1997. The potential for fraud is further increased because of costly examination resources required to determine compliance. ****2a,2b,2e****. The ITIN Program raises a range of concerns from tax policy to operational implementation. Tax policy concerns include: Conflict between the IRS’ disclosure policy, which does not provide for information sharing with the INS, and federal statutes requiring cooperation between federal agencies and the INS. Tax treatment of illegal aliens as residents, which allows tax benefits not available to nonresident aliens. Operational concerns include: Management controls did not ensure effective implementation of the Internal Revenue Service’s ITIN Program. ****2a,2b,2e****. Ineffective returns processing controls for taxpayers affected by the ITIN Program requirement.
To address tax policy and operational issues, the IRS needs to request input from appropriate external authorities and take internal actions to determine whether: The ITIN Program disclosure policy is in conformance with current Immigration laws. The Privacy Act Notification should be included on the ITIN application form. The Privacy Act Notification provides the warning that information can be provided to the Department of Justice within the parameters of disclosure law. The Administration wants to continue affording illegal aliens tax treatment similar to legal resident aliens. The role of the Acceptance Agent in facilitating the application process should be re-examined. Necessary information should be included in the ITIN database for future computer matching initiatives. Management’s Response: IRS management generally concurs with the recommendations in this report.
The IRS will request that the study groups for the Joint Committee on Taxation and the Secretary of the Treasury address the interrelationship of taxpayer confidentiality provisions under the Internal Revenue Code (IRC) with provisions of the Illegal Immigration Reform and Immigrant Responsibility Act of 1996. A Privacy Act Notice will be added to the Application for IRS Individual Taxpayer Identification Number (Form W-7), and a determination will be made as to whether the Form W-7 will require a disclosure statement under the definition of an "individual federal income tax return form." The Commissioner will be informed of the concern that certain illegal aliens may be receiving tax benefits under the IRC. Currently, the IRS does not have authority to act on the related recommendation.
****2a,2b,2e****. Using information from the ITIN database, checks to measure compliance with the terms of Acceptance Agent Agreements will be initiated by the IRS Foreign Payments Branch. A Request for Information Services will be prepared and submitted to request updates to the ITIN database screen display to permit the display of cross-reference information. Management’s complete response to the draft report is included in Appendix IX.
The objective of this review was to determine whether the Internal Revenue Service (IRS) effectively and timely implemented the Individual Taxpayer Identification Number (ITIN) Program. This implementation included processing applications for ITINs and individual income tax returns filed with ITINs. The review was conducted in the Offices of the Assistant Commissioner (International), (Submission Processing), and (Customer Service). Audit work was also conducted in the Philadelphia Service Center (PSC) with support from the Fresno Service Center (FSC). Collateral support was received from other service centers as needed. The audit was conducted from July 1996 through March 1998. The delay in issuance of this report was due to the management response being delayed until March 17, 1999, and our subsequent efforts to ensure the final report continued to be relevant. Appendix I contains the detailed objective, scope, and methodology for our review. Appendix II contains a listing of major contributors to this report.
Internal Revenue Code (IRC) Section 6109 Regulations provide for the ITIN. Effective for tax returns filed after December 31, 1996, foreign individuals are required to furnish either a Social Security Number (SSN) or an ITIN. Foreign individuals, not eligible for a SSN, should use the ITIN. Foreign individuals, their spouses and dependents apply for the ITIN using the Application for IRS Individual Taxpayer Identification Number (Form W-7). The IRS began processing Forms W-7 in July 1996. The IRS estimated that by September 30, 1997, 1.25 million applications would have been submitted. The ITIN Program was implemented to facilitate return filing, improve compliance on tax returns and other documents filed by nonresident aliens, and reduce taxpayer burden.
Overall, the ITIN Program was timely implemented. The IRS was successful in meeting the July 1, 1996, target date for processing Forms W-7. The IRS began issuing ITINs in July 1996. However, the ITIN Program, as implemented, may cause tax administration difficulties. This conclusion is based on ****2a,2b,2e****. In fact, over 340,000 applicants identified themselves as illegal aliens. The ITIN regulations require that both identity and foreign status be verified. ****2a,2b,2e****. The ITIN allows a person to file an Individual Income Tax Return (Form 1040). This condition complicates efficient tax law administration because providing illegal aliens with valid TINs allows for certain tax advantages and increases the potential for fraud. This potential is increased because of costly examination resources required to determine compliance. ****2a,2b,2e****. Several conditions from both the ITIN regulations and program implementation require action. These range from tax policy decisions to operational changes. Tax policy concerns include: Conflict between IRS regulations and the Illegal Immigration Reform and Immigrant Responsibility Act of 1996. Tax treatment of illegal aliens as United States (U.S.) residents. The operational concerns include: Management controls did not ensure effective implementation of the Internal Revenue Service’s ITIN Program. Publicity efforts were not effective in notifying potential taxpayers of ITIN requirements. The Acceptance Agent Program implementation has gone beyond its regulatory purpose. Taxpayer identification controls for cross-referencing information were not effective over the assignment of ITINs. Information needed to ensure compliance did not appear in the database. Returns processing controls were not effective for taxpayers affected by the ITIN requirement. Prior year tax returns were processed for refunds without required ITINs. Tax returns and payments from taxpayers submitted with ITINs were not accepted as filed by the IRS’ main computer system. We identified three additional areas where PSC management has already taken action. (The issues and management’s response can be found in Appendices VI-VIII.) Customer service needed to be improved on the telephone number dedicated to inquiries about ITINs. Adequate physical security was not provided over original documents submitted by persons applying for the ITIN. Processing of Forms W-7 during implementation of the ITIN Program needed improvement. IRS management was very cooperative in taking certain recommended corrective actions when necessary. This was especially important because actions needed to be taken on-line during the processing phase. The Internal Revenue Service’s Individual Taxpayer Identification Number Program Needs to Consider the Effect of Illegal Aliens on Disclosure and Tax Policy Issues We identified two issues that relate to the effect of illegal aliens on the ITIN Program: Conflict between IRS regulations and the Illegal Immigration Reform and Immigrant Responsibility Act of 1996. Tax treatment of illegal aliens as residents. These issues take on greater significance as the IRS comes under scrutiny by the Congress and with the passage of the Taxpayer Relief Act of 1997. Illegal alien presence in the U.S. is a congressional concern which is addressed by legislation in the Welfare Reform Act and the Illegal Immigration Reform and Immigrant Responsibility Act of 1996. In addition, the Taxpayer Relief Act of 1997 provides for additional tax advantages, which could increase the risk of fraud. Conflict between IRS Regulations and the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 The IRS needs to resolve a conflict between its internal regulations and a federal statute that affects illegal alien applicants for ITINs. The IRS provides disclosure protection to illegal alien applicants. The Congress has clearly stated how the federal government is to communicate between agencies concerning illegal aliens. The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (the Illegal Immigration Reform Act) states that information concerning illegal alien status should be provided to the Immigration and Naturalization Service (INS) notwithstanding any other law. However, in the ITIN regulations issued on May 29, 1996, the IRS states, "Generally, tax return and tax return information are confidential, as required by 26 USC 6103." Therefore, the IRS assurance of anonymity seems to be in conflict with a federal statute. We determined that the IRS did not consider provisions of the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 due to the timing of its passage in September 1996. However, the Illegal Immigration Reform Act provisions were introduced to both the House and Senate as early as 1995. Therefore, the IRS’ ITIN regulations were drafted when the INS Act provisions were in bills before the Congress. IRS management and the Office of Disclosure Litigation indicated that the IRS intentionally will not provide information to the INS. The rationale for this policy is that the Illegal Immigrant Statute is a "general" statute and does not change IRC Section 6103. The IRS requires that IRC Section 6103 be changed before providing the information to the INS. However, based on other IRS action, even current IRC Section 6103 provisions have not been followed. For example, the Form W-7 does not contain the Privacy Act statement, which in part, provides notification that information can be provided to the Department of Justice (DOJ) within the parameters set by IRC Section 6103. Tax Treatment of Illegal Aliens as Residents The IRS continues to consider illegal aliens as residents for tax purposes. We have the following concerns with this current policy: The alien makes the determination of residency. Tax benefits are being afforded to aliens.
IRC Section 7701 outlines the legal requirements for residency for tax purposes. This allows illegal aliens to file Forms 1040. Thus, illegal aliens are receiving tax benefits beyond nonresident alien taxpayers (who file U.S. Nonresident Alien Income Tax Returns (Form 1040NR)), who are in compliance with U.S. immigration laws.
Some of the tax advantages that are being realized by illegal aliens treated as residents include receiving spousal exemptions, standard deductions, and even some erroneous earned income credits. These tax advantages are not available to 1040NR filers.
Appendix IV of this report contains specific information about returns processing control weaknesses on returns with ITINs. Public disclosure of this information could provide taxpayers with information that could be used to defraud the government.
The IRS’ policy toward illegal aliens needs to reflect stated administrative policy and be in concert with federal statutes. The IRS needs to bring the conflict between the general and specific statutes to the attention of the Confidentiality of Tax Return Information study groups established by the IRS Restructuring and Reform Act of 1998. The independent studies are to be conducted by the Joint Committee on Taxation and the Secretary of the Treasury. Management’s Response: Management concurs with this recommendation. Section 3802 of the IRS Restructuring and Reform Act of 1998 directs the Joint Committee on Taxation and the Secretary of the Treasury to conduct separate studies of the scope and use of provisions regarding taxpayer confidentiality. The IRS will request that the study groups address the interrelationship of taxpayer confidentiality provisions under the IRC with provisions of the Illegal Immigration Reform and Immigration Responsibility Act of 1996. The IRS needs to include a Privacy Act statement on the Form W-7 application form. The Privacy Act notification provides the warning that information can be provided to the DOJ within the parameters set by IRC Section 6103. Management’s Response: Management concurs with this recommendation. A Privacy Act Notice will be added to the Form W-7. Also, Section 3508 of the IRS Restructuring and Reform Act of 1996 requires that any instruction booklet accompanying an individual federal income tax return form shall include a description of the conditions under which return information may be disclosed to any party outside the IRS. The IRS will determine if Form W-7 meets the definition of an "individual federal income tax return form" and, if so, include a disclosure statement. The IRS needs to bring the illegal alien tax issue to the attention of the Commissioner. A decision needs to be made by the Administration whether a tax law change should address returns filed with an ITIN that have a Wage and Tax Statement (Form W-2), with a SSN. We recommend that these returns be treated as Forms 1040NR to eliminate certain tax advantages. Management’s Response: The Commissioner will be informed of Treasury Inspector General for Tax Administration’s concern that certain illegal aliens may be receiving tax benefits under the IRC. The IRS does not have the authority, under the IRC and Regulations, to implement the recommendation. Administratively, consideration should be given to freezing the account from refunding until the discrepancy is resolved. Management’s Response: ****2a,2b,2e**** Office of Audit Comment: The IRS needs to examine the overall Revenue Protection Strategy to ensure that returns with ITINs are ****2a,2b,2e****. This could be done on a sample basis. Subsequent to the issuance of the draft report, the Office of Audit determined that there were 180,662 Tax Year 1997 Form 1040 returns filed with the ITIN as the identifying number. Management Controls Did Not Ensure Effective Implementation of the Internal Revenue Service's Individual Taxpayer Identification Number Program The implementation of the ITIN Program could be improved in the following areas: Publicity efforts were not effective in notifying potential taxpayers of ITIN requirements. The Acceptance Agent Program implementation has gone beyond its regulatory purpose.
In October 1996, we issued an Audit Memorandum reporting that the IRS did not timely or comprehensively publicize the requirement to obtain an ITIN. A publicity strategy was not in place to coincide with the inauguration of the ITIN Program in July 1996. Publicity included press releases, news articles, and presentations to practitioners. However, these efforts were not adequately targeted at the taxpayers likely to use the ITIN. In addition, we reported that the publicity level may have contributed to a lower than expected number of ITIN applications. The IRS expected that 250,000 applications would be filed from July 1 through September 30, 1996. Our results showed the IRS received only 17,787 (7 percent) of the expected filings as of late September 1996. We further concluded that the low publicity level would affect taxpayer burden and the IRS’ resources. Taxpayer burden would be increased because, without an awareness of the ITIN requirement, tax returns filed by these individuals would not be processed. In addition, the IRS' resources would be strained when the imminent volume of ITIN applications from taxpayers was received. The IRS did not have a publicity strategy in place because efforts were directed toward ensuring readiness for ITIN processing at PSC. IRS policy provides for timely informing taxpayers on the laws and regulations. Efforts should be made to meet taxpayers’ needs. We recommended that the IRS immediately increase publicity to educate taxpayers on ITIN requirements. Actions to accomplish this included: providing ITIN applications to taxpayers assigned temporary TINs in Calendar Year 1996, and identifying the countries where publicity would be most effective. In addition, we recommended the IRS continue to process tax returns in the same manner as 1996, and send an application to those taxpayers that file without a required ITIN. Some of the actions taken by IRS management in response to our memorandum included a mail-out conducted on December 9, 1996, for approximately 308,000 individuals who had previously been assigned temporary "900" numbers. A "900" number is the prefix used for temporary numbers assigned to facilitate returns processing. Other IRS actions included: 1) sending an extensive Question and Answer package to all IRS field offices, 2) sending an ITIN package to 11 national organizations, and 3) analyzing the individual nonresident alien population. In addition, 1997 returns with a missing primary or secondary TIN were processed in a manner similar to the process used in 1996. (A TIN is required to process a tax return.) For all other returns, correspondence was issued, which included the toll-free telephone number needed to obtain information. The Acceptance Agent Program Implementation Has Gone Beyond its Regulatory Purpose Effective May 29, 1996, authority for the Acceptance Agent Program was included in the IRC Section 6109 Regulations. To facilitate the process of allowing foreign individuals to obtain ITINs, the Section 6109 Regulations were amended to include authority for the IRS to "accept" persons to act as agents on behalf of taxpayers. We identified two issues concerning the implementation of the Acceptance Agent Program: The program has provided an extended service to domestic applicants. Acceptance Agents are acting in a dual-agent role. As a result, the Acceptance Agent Program has not met the regulatory requirement of serving foreign applicants. The Acceptance Agent Program Has Provided an Extended Service to Domestic Applicants Initially, the IRS intended to limit the Acceptance Agent Program to persons authorized to practice before the IRS. These enrolled agents were required to provide their Employer Identification Number (EIN) on submitted Forms W-7 so the IRS could identify them as authorized Acceptance Agents. However, some tax preparation agency employees do not have EINs. In order to process Forms W-7 submitted by Agents not having EINs, it was necessary for the IRS to allow Electronic Filing Identification Numbers (EFINs) as Acceptance Agent identification (using the EFIN required special approval from IRS Chief Counsel). Further, the Office of Refund Fraud advised that they discouraged EFINs as Acceptance Agent criteria because of identified risk factors. Overall, the nine-month delay in executing the Acceptance Agent agreements affected PSC resources designated for the ITIN Program. The Request for Information Services (RIS) was not submitted timely to allow the ITIN database to accept EFINs. As a result, PSC had to develop a manual system to process the Forms W-7 filed by Acceptance Agents without EINs. The manual system was converted to an automated system in January 1998. The Acceptance Agents Are Acting in a Dual-Agent Role In addition to Acceptance Agents acting on behalf of taxpayers as established in IRC 6109 regulations, the role of the Acceptance Agent has been extended to act on behalf of the IRS. Acceptance Agents are required to enter codes in the box designated "For IRS Use Only" on the Form W-7 after validating the identity and foreign status of the ITIN applicant. ****2a,2b,2e**** Recommendation The IRS needs to ensure Acceptance Agents are in complete compliance with the signed agreement. The IRS needs to develop a compliance system to ensure Acceptance Agents are acting on behalf of the taxpayer. This could include a plan, compliance checks, and a measurement system for Acceptance Agents located abroad.
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