Millions of illegal immigrants are getting a bigger tax refund than you. Eyewitness News shows a massive tax loophole that provides billions of dollars in tax credits to undocumented workers and, in many cases, people who have never stepped foot in the United States. And you are paying for it!

Note: This is part one in a two-part series. Read part two here.

INDIANAPOLIS - Inside his central Indiana office, a longtime tax consultant sits at his desk, shaking his head in disbelief.

"There is not a doubt in my mind there's huge fraud taking place here," he said, slowly flipping through the pages of a tax return.

The tax preparer does not want you to know his name for fear of reprisal, but he does want you to know about a nationwide problem with a huge price tag.

He came to 13 Investigates to blow the whistle.

"We're talking about a multi-billion dollar fraud scheme here that's taking place and no one is talking about it," he said.

The scheme involves illegal immigrants -- illegal immigrants who are filing tax returns.

How it works

The Internal Revenue Service says everyone who is employed in the United States – even those who are working here illegally – must report income and pay taxes. Of course, undocumented workers are not supposed to have a social security number. So for them to pay taxes, the IRS created what's called an ITIN, an individual taxpayer identification number. A 9-digit ITIN number issued by the IRS provides both resident and nonresident aliens with a unique identification number that allows them to file tax returns.

While that may have seemed like a good idea, it's now backfiring in a big way.

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.

"Here's a return right here: we've got a $10,3000 refund for nine nieces and nephews," he said, pointing to the words "niece" and "nephew" listed on the tax forms nine separate times.

"We're getting an $11,000 refund on this tax return. There's seven nieces and nephews," he said, pointing to another set of documents. "I can bring out stacks and stacks. It's just so easy it's ridiculous."

20 kids = $30,000

WTHR spoke to several undocumented workers who confirmed it is easy.

They all agreed to talk with WTHR investigative reporter Bob Segall and a translator as long as WTHR agreed not to reveal their identity.

One of the workers, who was interviewed at his home in southern Indiana, admitted his address was used this year to file tax returns by four other undocumented workers who don't even live there. Those four workers claimed 20 children live inside the one residence and, as a result, the IRS sent the illegal immigrants tax refunds totaling $29,608.

13 Investigates saw only one little girl who lives at that address (a small mobile home). We wondered about the 20 kids claimed as tax deductions?

"They don't live here," said the undocumented worker. "The other kids are in their country of origin, which is Mexico."

He later explained none of the 20 children have ever visited the United States – let alone lived here.

So why should undocumented workers receive tax credits for children living in a foreign country, which is a violation of IRS tax rules?

"If the opportunity is there and they can give it to me, why not take advantage of it?" the worker said.

Other undocumented workers in Indiana told 13 Investigates the same thing. Their families are collecting tax refunds for children who do not live in this country. Several of the workers told WTHR they were told it was legal for them to claim the tax credit for a child who does not live in the United States.

IRS was repeatedly warned

"The magnitude of the problem has grown exponentially," said Russell George, the United States Department of Treasury's Inspector General for Tax Administration (TIGTA).

And he says the IRS has known about the problem for years.

George has repeatedly warned the IRS that additional child tax credits are being abused by undocumented workers. In 2009, his office released an audit report that showed ITIN tax filers received about $1 billion in additional child tax credits. Last year, the inspector general released a new report showing the problem now costs American tax payers more than $4.2 billion.

"Keep in mind, we're talking $4 billion per year," he said. "It's very troubling."

What George finds even more troubling is the IRS has not taken action despite multiple warnings from the inspector general.

"Millions of people are seeking this tax credit who, we believe, are not entitled to it," said the inspector general. "We have made recommendations to [IRS] as to how they could address this, and they have not taken sufficient action in our view to solve the problem."

Other information obtained from the TIGTA audits include:

· Claims for additional child tax credits by ITIN filers have skyrocketed during the past decade, from $161 million in 2001 to $4.2 billion in tax year 2010.

· Undocumented workers filed 3.02 million tax returns in 2010. 72% of those returns (2.18 million) claimed the additional child tax credit.

· In 2010, the IRS owed undocumented workers more in claimed additional child tax credits than it collected from those workers in taxes.

Agency responds – sort of

What does the IRS have to say about all this?

The agency sent WTHR a statement, defending its policy of paying tax credits to illegal immigrants.

"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," the statement said.

George disagrees with that position and believes the IRS should be doing more to prevent undocumented workers from getting billions in US tax dollars.

"The IRS is not doing something as simple as requesting sufficient documentation from people seeking this credit," he said. "Once the money goes out the door, it's nearly impossible for the IRS to get it back."

Over the past month, WTHR has tried to ask the IRS more questions about its efforts to prevent abuse involving additional child tax credits.

Despite repeated phone calls, e-mails and a visit to IRS headquarters in Washington, the agency said none of its 100,000 employees had time to meet with 13 Investigates for an interview. An IRS spokeswoman said all staff were too busy because of the tax filing deadline in mid-April.

Apparently, the IRS doesn't have time to respond to some tax preparers, either.

Last year, our whistleblower noticed dozens of undocumented workers had used phony documents and false income to claim tax credits. He reported all of it to the IRS.

"These were fraudulent, 100% fraudulent tax returns, but I got no response; absolutely none. We never heard a thing," he said. "To me, it's clear the IRS is letting this happen."

The IRS tells WTHR it can do nothing to change the current system unless it gets permission from Congress. In other words, according to the IRS, closing the loophole would require lawmakers to pass a new law specifically excluding illegal immigrants from claiming additional child tax credits.

The big questions now: Is Congress willing to do that?

What's next

Tomorrow night, 13 Investigates will show you how lawmakers are reacting to WTHR's investigation and what they plan to do about. You'll also hear why some undocumented workers say the credits are essential and should be left intact. Our investigation continues Friday night at 11:00.

Full statement to WTHR from the Internal Revenue Service

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. The IRS has procedures in place specifically for the evaluation of questionable credit claims early in the processing stream and prior to issuance of a refund. The IRS continues to work to refine and improve our processes.

From Indiana to Capitol Hill, thousands of people are now weighing in on a WTHR investigation exposing a tax loophole worth billions for undocumented workers. But what, if anything, can be done about it?

Note: This is part two in a two-part series. Read part one here.

INDIANAPOLIS - Congressman Dan Burton (R – Ind) is frustrated – very frustrated – after learning the details of an Eyewitness News investigation.

"Why in the world are we doing this?" he asked. "Are you kidding me? The cost to the American tax payer is huge!"

The veteran lawmaker is responding to what 13 Investigates discovered all across Indiana: illegal immigrants getting big tax refunds from the Internal Revenue Service thanks to a loophole in federal law.

MORE: Tax loophole costs billions

The loophole allows undocumented workers to collect what's called an additional child tax credit. The credit – up to $1,000 per child – can be claimed even by families who pay nothing in taxes, in many cases resulting in a cash payment from the IRS. It is intended for working families with children who live in the same home.

But a local tax preparer came to Eyewitness News to blow the whistle on millions of people who, he believes, are taking advantage of the system. He says many illegal immigrants are claiming the tax credit for children who've never lived in this country, and he showed 13 Investigates dozens of redacted tax returns to prove his point.

"There is not a doubt in my mind there is huge fraud taking place here," said the whistleblower, who asked not to be identified for fear of reprisal. "I can bring out stacks and stacks. It's just so easy it's ridiculous."

Exposing the loophole

An undocumented worker in southern Indiana told 13 Investigates just how easy it truly is.

He said four other illegal immigrants file tax returns using his address, even though none of them actually lives there. And he said this year, those four workers filed tax returns claiming 20 children live inside his small trailer home. As a result, the IRS sent the illegal immigrants tax refunds totaling more than $29,000.

But none of the 20 children listed as dependents on the tax returns lives in Indiana – or even in the United States.

"No, they don't live here," admitted the undocumented worker, who lives with his young daughter. "The other kids are in their country of origin, which is Mexico."

The IRS granted tax credits for the 20 children anyway, even though the agency's own policy states they are not eligible. (Children are eligible for additional child tax credits only if they are US citizens or minor resident aliens who live in the US with a tax filer for more than half of a calendar year.)

According to WTHR's whistleblower, cases like this one are commonplace because the IRS does little to verify the eligibility of both the undocumented workers filing for additional child tax credits and the dependents listed on their tax returns.

13 Investigates has confirmed it's a growing problem. It's nationwide. And it's out of control.

Billions already paid

Eyewitness News obtained US Treasury Department audit reports that show illegal immigrants now get additional child tax credits totaling $4.2 billion dollars each year. The department's Inspector General for Tax Administration has repeatedly warned the IRS that undocumented workers are abusing the additional child tax credit.

"Millions of people are seeking this credit who, we believe, are not entitled to it," said inspector general Russell George. "We have made recommendations to [IRS] as to how they could address this and they have not taken sufficient action in our view to solve the problem. It's very troubling."

Why has the IRS done nothing?

Despite phone calls, emails, even a visit to IRS headquarters in Washington to get answers, no one at the IRS would meet with WTHR.

The agency instead sent 13 Investigates a short statement (see below) saying it is following the law, and current tax law does not prevent undocumented workers from getting additional child tax credits. The IRS claims it can't change that without a new law.

Rep. Burton and other lawmakers are now ready to act.

Lawmakers looking for a fix

"We've got to deal with it," he said. "I knew this was a problem, but until hearing what you found, I didn't know it was this severe."

Rep. Burton and dozens of other House Republicans have co-sponsored a bill that would essentially authorize additional child tax credits only for US citizens. House Resolution 1956 would require tax filers to provide a valid social security number to receive an additional child tax credit.

The IRS provides illegal immigrants with an ITIN (individual taxpayer identification number) so they can file tax returns, but most undocumented workers are not eligible to receive a social security number.

HR 1956 has sat idle in the House Ways and Means Committee for almost a year.

However, language from the bill is now included in a package of proposed budget savings measures that House lawmakers are expected to consider in May. While the budget package may have enough support to pass the House, it is expected to die a quick death in the Democratic-controlled Senate.

"This should not be a partisan issue because we're all concerned about saving taxpayer dollars and not wasting them on fraudulent things like this," said Rep. Burton. "But I don't think Democrats want to deal with this with right now."

Not all Democrats are opposed to limiting additional child tax credits to US citizens.

Last fall, Senator Claire McCaskill (D – Mo) sent a letter to IRS Commissioner Douglas Shulman asking him to stop the agency's payments of additional child tax credits to undocumented workers. "This is deeply problematic and must be remedied," the senator wrote.

But few other Democratic lawmakers have voiced support for eliminating the child tax credits for undocumented workers.

Republicans plan to keep pushing the issue forward.

"This rampant abuse of hardworking taxpayer dollars is just wrong," said Rep. Sam Johnson (R – Tex), who authored HR 1956. "It's time we close this tax loophole and put a stop to the child tax credit sham."

Rep. Burton agrees.

"I'm a taxpayer, and the thought of me paying for 24 people who are living in one trailer boggles my mind, especially when you tell me most of them are still living in Mexico. That's unconscionable." he said.

"Who's going to help?"

Many undocumented workers see the issue very differently.

"It's not taking advantage. I'm very thankful to this country for the help it gives me," said an illegal immigrant in central Indiana, who decided to talk with 13 Investigates as long as we agreed not to reveal his identity.

The worker has lived in the United States for 14 years. He owns a home in Indiana, pays taxes and is raising three children who are all honor roll students. This year, he received a $9,000 tax refund that includes additional child tax credits – not only for his children who live in Indiana, but also for four nieces and nephews in Mexico.

The tax credits help him care for his young family members south of the border, and he says attempts by Congress to revoke the credits could have dire consequences.

"Who's going to help them if they're not eligible ... to avoid them ending up in the drug mafia, begging in the street, being raped? What happens when they get sick?" he asked. "There's a lot of things that could happen to them if you don't help … When you come here [to the United States], to your family down there, you are their hope."

Taking additional child tax credits away from undocumented workers would also have an impact on millions of children legally living in this country. Children of illegal immigrants who are born in the US are legal US citizens and, in many cases, those children would no longer be eligible to receive the tax credits under proposals like HR 1956.

But the inspector general insists refundable tax credits were never intended for illegal immigrants – let alone people who've never stepped foot in the United States.

"It's being abused by people who are not entitled to use it, and that's problematic," George told Eyewitness News.

"It's cheating the American taxpayer," agreed Burton. "We all believe in humanity and humanitarianism, but we've got a $15 trillion national debt. We can't subsidize the whole world."

What can you do?

Congress may be voting on a budget measure in the coming weeks, and a budget reconciliation package now being considered in the House of Representatives contains language that would limit additional child tax credits to US citizens with a valid social security number. If you feel strongly about this issue – one way or another – now is a good time to let your lawmakers know. Their contact information is listed below:

US Representatives – Indiana

District

Name

Party



Phone


1

Visclosky, Peter

D


202-225-2461


2

Donnelly, Joe

D


202-225-3915


3

Stutzman, Marlin

R


202-225-4436


4

Rokita, Todd

R


202-225-5037


5

Burton, Dan

R


202-225-2276


6

Pence, Mike

R


202-225-3021


7

Carson, André

D


202-225-4011


8

Bucshon, Larry

R


202-225-4636


9

Young, Todd

R


202-225-5315





US Senate – Indiana

Daniel Coats (R)
493 Russell Senate Office Building
Washington, DC 20510
(202) 224-5623
www.coats.senate.gov/contact/

Richard Lugar (R)
306 Hart Senate Office Building
Washington, DC 20510
(202) 224-4814
www.lugar.senate.gov/contact/

US Representatives – All states

Contact Information

US Senate – All States

Contact Information

Full statement to WTHR from the Internal Revenue Service:

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. The IRS has procedures in place specifically for the evaluation of questionable credit claims early in the processing stream and prior to issuance of a refund. The IRS continues to work to refine and improve our processes.

At a time when the cash-strapped federal and state governments are looking for ways to boost revenue, corporate tax avoidance strategies have taken on urgent importance. There’s no doubt that Apple, which is poised to set a record this year for profits by an American company, pays less in taxes than other firms. Last year, The Times says Apple paid a global cash tax rate of only 9.8% — $3.3 billion on profits of $34 billion — compared to a tax rate of 24% for Walmart, which the paper says is about average. Apple avoided paying $2.4 billion in federal taxes last year, the paper said, citing research by former Treasury Department economist Martin A. Sullivan. (There’s some dispute about the way The Times analyzed the tax numbers, but the paper stands by its reporting, a spokesperson told me Monday.)

1.) "This should not be a partisan issue because we're all concerned about saving taxpayer dollars and not wasting them on fraudulent things like this," said Rep. Burton. "But I don't think Democrats want to deal with this with right now."

2.) Not all Democrats are opposed to limiting additional child tax credits to US citizens.

3,.) Last fall, Senator Claire McCaskill (D – Mo) sent a letter to IRS Commissioner Douglas Shulman asking him to stop the agency's payments of additional child tax credits to undocumented workers. "This is deeply problematic and must be remedied," the senator wrote.

4.) But few other Democratic lawmakers have voiced support for eliminating the child tax credits for undocumented workers.

Republicans plan to keep pushing the issue forward.

LordofHats wrote:Part of it is that farmers are a major voting block for the Republican party. Farmers benefit greatly from this loophole as they collected the tax forms, that many of their workers have no idea what they are, and then they pocket all the returns. SS has known about this for nearly twenty years.

Republicans don't want it fixed anymore than Democrats unless not fixing it becomes too problematic.

Ouze wrote:I think the easiest way to fix this would be for a valid SSN to be required for every dependent listed.

There is no fix needed for the example of "the guy who claimed 20 children who live in Mexico", because we already have ample remedies for that: he's committing felony fraud and should be prosecuted under Title 26 USC § 7206(1), and whomever helped him fill it out is also violating Title 26 USC § 7206(2), as well as Title 18 USC § 371 - up o 8 years apiece, up to $500k fines, and of course possible deportation.

LordofHats wrote:The article is somewhat misleading. Many illegals don't get the tax returns. Their employers do.

CptJake wrote:

Ouze wrote:I think the easiest way to fix this would be for a valid SSN to be required for every dependent listed. (snip)

I bet it is possible to get ITINs for those kids. So, a fix may be needed. Looking at page 3 of this: http://www.irs.gov/pub/irs-pdf/p503.pdf it would appear you can get ITINs for the kids.

CptJake wrote:In regard your #2, it may not be fraud. If the worker IS supporting those kids, they are his dependents. He can legally claim them as such. You would have to show those kids are NOT his dependents to establish fraud.

biccat wrote:I find it unlikely that a farmer would put his entire livelihood at risk. I suspect the person who already committed a crime and has little at stake is more likely to commit another crime.

Grakmar wrote:
If the kids are in actually in the US and are actually the worker's dependents, then not only is it not fraud, but it's working as intended.

Easy E wrote:What I got from this piece....

Fear the Alien, Hate the Alien, Purge the Alien

I'm not sure that was it's intent.

Lordhat wrote:

Easy E wrote:What I got from this piece....

Fear the Alien, Hate the Alien, Purge the Alien

I'm not sure that was it's intent.

You forgot the word illegal three times in a row.