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Lax system lets foreign workers to get millions from IRS

Three Ohio addresses applied for 1,000 taxpayer ID numbers.

For years, the IRS had a flawed system to prevent people, including suspected illegal immigrants, from using fake documents to improperly receive sizable tax refunds.

Foreign workers and others who are not eligible for Social Security numbers can receive identification numbers to file their taxes. But many applications seeking taxpayer ID numbers could have been wrongly approved based on questionable documents because the review process was so lax, according to an audit by the Treasury Inspector General for Tax Administration.

The IRS did not try to identify and stop potential fraud in the program by analyzing applicant information, such as how often the same mailing addresses appeared on multiple applications.

Three addresses in Ohio were used on more than 1,000 applications for taxpayer ID numbers, according to data obtained by the Dayton Daily News under the Freedom of Information Act.

Ten mailing addresses in five states —Arizona, California, Florida, Georgia and North Carolina — were linked to about 54,000 tax refunds worth $86.4 million.

“The (IRS) ignored the fraud and kept the machine rolling,” said Howard Antelis, a tax examiner who started his IRS career in Dayton and who helped initiate the audit. “You could basically invent people through false documentation and claim them on your tax return and get the tax credits and basically steal a tax refund.”

As a result of the audit, the IRS now requires applicants for taxpayer ID numbers to submit original documents, and the agency said it has improved training and data-analysis procedures to better prevent fraud.

But some taxpayers advocates said the new rules place an unfair burden on applicants that will discourage workers from complying with the law and paying income taxes.

Foreign workers refunded $6.8B

All workers in the United States are typically required to pay income taxes, regardless of citizenship status.

The IRS assigns Individual Taxpayer Identification Numbers, or ITINs, to illegal immigrants, foreign nationals and others who earn wages in the United States but are not eligible to receive a Social Security number. Congress created the program in 1996.

A taxpayer ID number does not authorize an illegal immigrant to work in the country, nor does it grant an immigration status or qualify the recipient for the Earned Income Tax Credit or Social Security benefits, experts said.

But illegal immigrants and other ITIN taxpayers often are eligible for tax refunds if too much of their wages are withheld or they have dependents who qualify for tax credits.

In 2011, the IRS processed 2.9 million tax returns with ITINs and issued $6.8 billion in refunds, according to the Inspector General. In 2010, the IRS processed 2.2 million tax returns with ITINs that had no tax liability, leading to $4.9 billion in refunds.

The number of tax returns with ITINs increased 18 percent between 2008 and 2011.

But IRS management created an environment that discouraged tax examiners from identifying questionable ITIN applications, according to a June 2012 audit by the Inspector General.

The audit was launched after Antelis and another IRS employee reportedly complained to members of Congress about fraud in the program, and the lawmakers referred the complaints to the federal watchdog group.

The Inspector General confirmed many of the allegations and found the IRS failed to use information in its computer system to look for patterns of fraudulent activity among ITIN applicants.

Between November 2006 and October 2011, about 6,650 ITINs were assigned to people using a single address in Columbus on their applications, the audit found.

During the same period, about 154 mailing addresses each were listed on at least 1,000 ITIN applications. Of the closest cities in the region, three were in Columbus, two in Indianapolis and one in Florence, Ky., according to the data obtained by the newspaper.

About 15,795 ITINs were assigned to people using one address in Phoenix.

The IRS also failed to identify questionable patterns of refund distribution.

Easy to cheat

In 2011, the IRS sent 23,994 ITIN tax refunds worth $46.4 million to people associated with one address in Atlanta, the audit said. An address in Oxnard, Calif, was linked to 2,507 ITIN tax refunds worth $10.4 million.

“You can identify patterns of theft through addresses and certain types of documents,” said Antelis, a tax examiner at the ITIN processing center in Austin, Texas., whose first job with the IRS was at Wright-Patterson Air Force Base.

At the height of the problem, between 80 to 90 percent of applications for ITINs were fraudulent, Antelis said. Many applicants were claiming 10 or more dependents, which made them eligible for large refunds because of tax credits, he said.

Additional Child Tax Credits claimed by ITIN tax filers in 2011 totalled $4.2 billion. The credit was worth as much as $1,000 per qualifying child.

The review and verification process of ITIN applications was terribly flawed, because the IRS accepted photocopies of government documents instead of original copies if they were notarized, Antelis said. Notary stamps are easy to acquire and photocopies are easy to forge and modify, he said.

“We would accept photocopies, which can be altered in any way you want, and all they needed was a notary public stamp on them for us to call them good,” Antelis said. “Any idiot can get an official-looking notary stamp — there is a (website) where you can order an official looking notary stamp for $30 — and we never checked the veracity (of the stamps).”

Recipients of ITINs, which included organized crime rings and unscrupulous tax preparers, cheated the federal government of billions of dollars, he said. The IRS was more concerned about processing the applications quickly than making sure they were legitimate, he said.

“We are overwhelmed with work, we don’t have the resources or manpower, and (IRS management) believed it was just easier to assign stuff than do the actual investigations,” he said. “We weren’t examining anything — unless they made some kind of processing error or other mistake.”

After the Inspector General released its audit, the IRS said it would take corrective action to improve the integrity of the program, which included providing more training to tax examiners and changing the rules so that ITINs issued today expire after five years.

The IRS no longer accepts notarized copies of documents: ITIN applicants must submit original documents or certified documents from the issuing agency.

ITIN applicants can still use Certifying Acceptance Agents — people and businesses authorized by the IRS to certify and validate the authenticity of their original documents so it is not necessary to mail them in. There are more than 30 acceptance agents in Ohio, including four in the southwest Ohio region.

But ITIN applications for dependent children now must contain original documents or certified copies from the issuing agency. IRS officials said this is to ensure child tax credits are not being misused.

After the new procedures were implemented, the number of ITIN applications rejected by the IRS as questionable increased 50 percent in the second half of 2012, auditors said.

Between Dec. 30, 2012, and April 27, 2013, overall ITIN applications decreased 46 percent and the percentage of rejected applications increased from 22 to 44 percent.

Unintended problems

But some taxpayer advocacy groups said this is a sign that the new requirements are burdensome and could reduce compliance with tax laws.

Many people may be unwilling to mail in their original documents, such as passports and national identification cards, in order to apply for ITINs because they cannot wait several months for the IRS to return them, said W. David Koeninger, project director of the Low-Income Taxpayer Clinic with Advocates for Basic Legal Equality, based in Toledo.

“Let’s say you come here from Mexico and the identification you need to use to get an ITIN is your passport — you have to give that up for two months,” he said. “How comfortable would you be living in a foreign country and giving up your U.S. passport for two months? … If you are not near a place where you can walk in to have a document certified, and you can’t go without the documents for two months, you just won’t apply (for ITINs),”

Taxpayer Assistance Centers provide an alternative to mailing original documents, but advocates said too often they are inaccessible.

“The recent changes to the ITIN program have made it difficult for taxpayers to file returns,” according to a June report to Congress by the National Taxpayer Advocate. “Those applying for dependent ITINs, who make up more than two-thirds of all applicants, must either send original documentation to the IRS, or travel to one of a relatively small number of designated (Taxpayer Assistance Centers), which can only certify copies of passports and national identification cards.”

The ITIN program was created to ensure everyone with a tax liability pays the taxes they owe. But the IRS has overreacted to the findings in the Inspector General audits and implemented new policies that will harm the agency’s ability to collect taxes, advocates said.

In an April letter to the IRS commissioner, the American Bar Association’s Section of Taxation urged the agency to eliminate the five-year expiration period for ITINs and eliminate the requirement of mailing original documents for dependents.

The IRS instead should focus on modernizing the technology it uses to process applications and expand in-person verification options for applicants, the letter said.


A federal audit revealed the IRS may have wrongfully issued tax returns to suspected illegal immigrants and others. Here's a look at data from the Individual Taxpayer Identification Number program, which serves foreign workers.

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