Child Tax Credit For Illegal Mexicans is Phony Story Gone Viral

Investigative Reporter Bob Segall, at Channel 13 Indianapolis, did the above story claiming that a "tax loophole" was permitting "undocumented workers" to collect billions of dollars ($4.2 billion last year) from the Treasury. Supposedly a tax-preparer with "thousands of examples" was blowing the whistle on this unfair scheme whereby filers of non-resident tax returns (Form 1040NR) were claiming their nieces and nephews living in Mexico as eligible to be counted using Form 8812. We have lots of tax cheats, one of whom heads the IRS and now some 2 million illegal aliens.
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. Eyewitness News has found many undocumented workers are claiming the tax credit for kids who live in Mexico.
First of all, there is no tax loophole.  IRS Publication 972, "Child Tax Credit"  defines among other things that a qualifying child for purposes of the child tax credit must be (at a minimum) a US resident alien.
Example: Your 10-year-old nephew lives in Mexico and qualifies as your dependent. Because he is not a U.S. citizen, U.S. national, or U.S. resident alien, he is not a qualifying child for the Child Tax Credit.
So what we have here is tax fraud pure and simple, as the "whistle blower" reported.
"We're talking about a multi-billion dollar fraud scheme here that's taking place and no one is talking about it," [the] tax preparer said.
I would also like to note that the tax credit is not "fully refundable" - as a matter of fact it not a refund at all and the credit is subject to some limitations. The Child Tax Credit is a part if the so-called Earned Income Tax Credit (EITC) and can result in a payment by the Treasury of up to $1,000 per qualifying child subject to limits affected by the beginning amount of EITC. Understand that the tax-filer did not have to first pay the IRS since this is not a tax refund.

Contrary to the tenor of the WTHR story line, the bad guys here are not necessarily the IRS auditors, although it would be nice if the Obama regime could get past "selective enforcement" policies.  Indeed the problem begins with our "Whistle Blower" and his ilk. The IRS has issued temporary regulations applicable to for-fee tax-preparers that now requires the following actions on their part in order to comply with Due Diligence guidelines associated with the EITC code.
To qualify for earned income credit, the primary facts the return preparer is to establish are:
  1. Verify name of taxpayer and child
  2. Verify accuracy of the social security numbers
  3. The relationship of child to the taxpayer
  4. Age of child
  5. Taxpayer is citizen or resident alien
  6. Child is resident of United States
  7. Child lived in the taxpayer’s residence more than half the year
  8. Taxpayer provided for the costs of the residence more than half the year
In the past, preparers have relied upon the oral evidence provided by the client. The new due diligence requirement appears to make it necessary to have a routine in place for requesting copies of documents from clients. Another key factor in determining due diligence is the asking for alternate documents when primary documents are not available. Until preparers are given better guidance, a combination of the following documents may be used as an argument to show that a preparer exercised due diligence  in attempting to furnish the required information:
  1. Birth certificate
  2. Social Security card
  3. School records
  4. Insurance records
  5. Day care records
  6. Medical records
  7. Rental contracts
  8. Green Card
Bob Segall's tax-professional/informer must actually sign the Form 8867 checklist which subjects the return-preparer to the guidelines above.  So I ask, who is the law-breaker? And the answer is: both the tax-filer and the tax-return-preparer. However, if the story didn't contain all these knee-jerk observations about an anonymous tax consultant who fears reprisals and that Individual Taxpayer Identification Number (ITIN) that substitutes for a social security ID; and the attempts to change a law that does not need changed; and a Treasury Department Inspector General crying in his beer - then nobody would watch Channel 13.  I know the feeling well, because you and I, dear reader, are the only people who will know the boring truth.

  • Gadfly:
    As a former "grunt" of the U.S. Treasury Dept (IRS division) let me say your call is SPOT ON!

    I remember sending SO many 1040 long forms w/ all th schedules attached (both domestic and foreign) to our QRDT department (investigative branch) for improper EIC deductions...most were simple math screwups, but we DID come across some that were blatant frauds.

    I suppose the worst of the bunch were the people who TREID to take a deduction when they didn't even qualify to file the LONG form initially, and were shipping the child (or children) between TWO parents BOTH of whom were claiming the FULL deductions.

    A REAL no-no.

    Nice to know the overall form itself hasn't changed all that much in the last 30 years.

    Very good post.

    Stay safe (and audit-free) out there.

  • Maybe you should read the Treasury Departments own findings

  • Anon:

    Please reread my piece. I explicitly said that the $4.2 million payout was because non-residents were claiming refunds for which they were not entitled ... and because paid tax preparers were certifying false information. Laws already on our books were being broken. Channel 13 would have you believe that our tax laws permitted this dishonesty.

    Perhaps I should have noted that it is sad that the Treasury auditors do not have the power to put into place an audit program on all non-resident returns in order to stop this abuse. I am unsure what the additional auditors hired in the last four years are doing, if not auditing obvious abuses.

    Thanks for your pertinent comment.

  • Story doesn't seem phony at all if you read the whole thing and the TIGTA report. Other fact checking organizations say it's true...

    Yes there does appear to be outright fraud, but if the IRS is not looking to stop the fraud as the TV station's follow-up reports seem to suggest, we're now talking about more than fraud. IRS workers said they're told to look the other way and to allow the fraud to take place. Sounds like it's turned into a great big loophole to me.

  • A tax "loophole" means that there is a legal way to avoid taxes. In the case of the Child Credit, there is nothing in the law that permits non-residents to claim this credit for children who do not reside in the United States. Every non-resident who does so is breaking our law and as I pointed out, every third-party tax preparer that signs off on these claims is also breaking our tax code and should be punished accordingly.

    The $4.2 Billion in credits is a real number according to the Treasury, but the Indiana Television station called this a "loophole" when indeed it is fraud which should result in immediate deportation at the very least.

    The IRS simply need to flag for audit all child credit claims above, say $2000, on non-resident returns. Not really difficult in this age of electronic tax filings. Perhaps Tim Geithner can explain why this cannot happen.

  • Gadfly:

    As a tax preparer, I have several comments about your anaysis.

    First, the facts... The Additional Child Tax Credit is not part of the Earned Income Tax Credit, as you suggest. Two very different credits. EITC was disallowed for ITIN filers a long time ago. ACTCs are permitted for ITIN holders, although I'm not sure why.

    The ACTC is classified by the IRS as a "fully refundable" tax credit. That term does not mean the credit is a refund. It means it is paid to an eligible tax filer, regardless of his tax liability.

    While I think you are defintely correct to call this fraud (not a loophole), I tend to agree with Anonymous that referencing the news report as "phony" is off base.

    The TV station might be using the term "loophole" loosely, even incorrectly, but it did highlight a problem that is rampant in tax offices and that few tax preparers, lawmakers or the IRS want to address. Based on the dozens of people who sent me a link to the report (from all over the country), I think the topic is now out in the open and might even be fixed.

    Loophole? No. True story? Absolutely. Personally, I think using the term "loophole" to descibe the reported abuse is no more offensive than using the term "phony" to describe the news report. I guess I'm willing to cut the reporter some slack for being brave enough to report a topic that no other media is talking about.

  • Thank you for your input, Mame. We do have to be careful is how we say things on blogs, just as Indy Channel 13 needs to be less bombastic with its dated "expose." The Treasury IG released the facts about non-resident claims for Child Tax Credits way back in September 2011.

    I will not retract my use of the word "phoney" because I truly believe it was - just as I believe that the honest tax preparer, as you obviously are, has an obligation not to participate in the filing of fraudulent tax returns (a point that goes over-the-head of Channel 13).

    As for the IRS, something is desperately amiss, since a computer filter will flag any and all Child Tax Credits on non-resident returns for review by some the 16,000 new agents hired by "Turbo Tax" Geithner. Misbehavior by the government is unforgivable.

  • My friends exboyfriend(mexican that uses 3 kids of his friends that happen to have last names like his. He bought tax I.d. through hispanic tax preparers office & gets money back each year) If you try to report the fraud to IRS even giving city state & where they work & phone numbers, they do nothing about it. They say I need tax I.d. #s...

  • I am so happy to read this. This is the kind of manual that needs to be given and not the random misinformation that's at the other blogs. Thanks for sharing this.

    PIC Scheme