An investigative report from Indiana television station WTHR highlights what they call a “loophole” in the tax code which may be costing tax payers billions by enabling illegal immigrants to claim tax credits for children not even living in the U.S. I’ve embedded the video package below, but for those of you at work there is a good write-up on their site as well. Did I say “potential”?

Each spring, at tax preparation offices all across the nation, many illegal immigrants are now eagerly filing tax returns to take advantage of a tax loophole, using their ITIN numbers to get huge refunds from the IRS.

The loophole is called the Additional Child Tax Credit. It’s a fully-refundable credit of up to $1000 per child, and it’s meant to help working families who have children living at home.

But 13 Investigates has found many undocumented workers are claiming the tax credit for kids who live in Mexico – lots of kids in Mexico.

“We’ve seen sometimes 10 or 12 dependents, most times nieces and nephews, on these tax forms,” the whistleblower told Eyewitness News. “The more you put on there, the more you get back.”

The whistleblower has thousands of examples, and he brought some of them to 13 Investigates. While identifying information such as names and addresses on the tax returns was redacted, it was still clear that the tax filers had received large tax refunds after claiming additional child tax credits for many dependents.

The report goes on to highlight several of these returns, actual redacted tax returns, generating refunds in excess of $10,000. So it’s easy to imagine how these numbers could really add up on a national basis.

Even more outrageous than the report itself however is a statement WTHR received from the IRS after the story aired. See no evil, hear no evil?

The law has been clear for over a decade that eligibility for these credits does not depend on work authorization status or the type of taxpayer identification number used. Any suggestion that the IRS shouldn’t be paying out these credits under current law to ITIN holders is simply incorrect. The IRS administers the law impartially and applies it as it is written. If the law were changed, the IRS would change its programs accordingly. The IRS disagrees with TIGTA’s recommendation on requiring additional documentation to verify child credit claims. As TIGTA acknowledges in this report, the IRS does not currently have the legal authority to verify and disallow the Child Tax Credit and the Additional Child Tax Credit during return processing simply because of the lack of documentation.

Here’s the real problem and I’m not sure calling this a tax “loophole” is really the best way to describe it. As the law is written, it’s perfectly legal for non-legally resident aliens to file tax returns. It’s required actually. The law also makes no distinction between legal and illegal residents when it comes to claiming most tax credits and deductions. So under current law an illegal immigrant can claim the Child Tax Credit on their return, as pointed out by the IRS in their response.

So this scheme is actually legal? (Cue outrage). Well, not exactly. The IRS web site has a good summary of the eligibility criteria for the Child Tax Credit, but in order to qualify for this credit the child being claimed must be a U.S. citizen or green card holder, and must have also been a resident of the tax payers’ household for more than half the year (among other requirements). So an illegal immigrant claiming a tax credit for one or more eligible children born and living with them in the U.S. is perfectly legal. Claiming that a couple dozen nieces and nephews live with you in one house in Indiana when they actually live in Mexico? Not so much.

So there is plenty of fodder for outrage here, obviously, not the least of which is the seeming indifference to this problem on the part of the IRS. I gather from their response that there is no mechanism in place to verify the immigration or residency status of the children being claimed. Outside the course of a regular audit I assume. How many people residing in the U.S. illegally would ever even show up for an IRS audit? And if I were really cynical I would posture that knowing this, the IRS would not even bother to direct their limited resources towards verifying many of these returns.

I think it’s also important to note that there is no reason to assume that this type of fraud is limited to those residing here illegally. Given how it easy it seems to be to get away with this, I suspect the scope of this problem is much, much greater than this. While I don’t expect the GOP to place much emphasis on this between now and November, this should be one of the major arguments for tax reform. Rather than having a tax code riddled with loopholes such as this which enable those willing to break the law to take advantage of their fellow tax payers, why not have a flatter, simpler code which eliminates most if not all of these types of credits and deductions. And if the goal is really to provide income support to low-income families (and a refundable tax credit is just welfare in disguise), then it should be called what it is and should be enacted as part of legislation which includes a mechanism to prevent this sort of abuse from taking place.

(Cleaned up a couple of wording and grammatical problems after publishing)