Tax refund Dilemma for illegal immigrants

More than $1 billion in tax revenue is collected by the Internal Revenue Service each year from the paychecks of illegal alien workers in the United States.  Those workers know that they are being denied refunds on the money they pay, but fear they may lose their jobs if they press the issue.

Staff Writer Winthrop Quigley of the Albuquerque Journal wrote of the dilemma this poses in the May 19 issue of the paper.

According to Quigley, tax preparers say that illegal immigrants believe the state of New Mexico is deliberately keeping the money owed the taxpayers to encourage them to leave the state. New Mexico Taxation and Revenue Secretary Demesia Padilla said the state is just trying to make sure the refunds get to the right taxpayers.

Experts estimate between 50 and 70 percent of foreign nationals who are living in the United States illegally pay income tax. It isn’t clear precisely how much they pay, but it appears to be more than $1 billion a year to the federal government.

The IRS doesn’t distinguish between foreign nationals in the country legally and those here illegally. To the tax man, an alien is either resident or nonresident.

A nonresident alien is typically taxed only on “income which is derived from sources within the United States and/or income that is effectively connected with a U.S. trade or business,” according to the IRS. Resident aliens’ incomes are taxed the same way as a citizen’s. An alien is resident if he or she lives in the United States for the required number of days out of a year, which makes many illegal immigrants resident aliens for tax purposes.

However, since a worker in the country illegally isn’t entitled to a Social Security number or benefits, filling out the paperwork so taxes can be paid and refunds collected is a challenge.

The IRS’s solution is to issue an individual taxpayer identification number, or ITIN, to people who aren’t eligible to get Social Security numbers. The IRS says ITINs are issued “regardless of immigration status” and can be used only to report tax information.

So far so good, but when the illegal immigrant shows up on the job site and is required by the employer to fill out an income-tax withholding form, the boss wants to see a Social Security number, so the worker will invent one. In addition to income-tax withholding, 7 percent of the workers’ wages is taxed for Social Security benefits that the worker will never collect.

At tax time, the IRS is able to match the ITIN with the fake Social Security number the employer has used to withhold income taxes. Until last year, the state did the same thing, and even now tax returns filed on paper seem to be processed without a hitch.

Returns filed electronically are being rejected. Taxpayers are sent a letter saying there are “discrepancies” between the “personal identifying information submitted on the return” and “supporting documents,” which is to say the Social Security number on the taxpayer’s documents isn’t found in Taxation and Revenue records.

The immigration laws Congress has been debating are only a piece of the legal maze illegal immigrants must navigate. State and federal tax laws add another layer of complexity to already complicated lives.

Neither the Internal Revenue Service nor the state Taxation and Revenue Department care how a taxpayer got here so long as he or she pays the taxes owed.

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Source:  The Albuquerque (NM) Journal