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IRS criticized for payment of $4B to workers not legally in the U.S.

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The IRS is under fire for a program that allows workers not legally in the U.S. to claim tax credits for dependent children. Recipients of the program, which includes illegal immigrants, foreign nationals not eligible for Social Security cards, nonresident aliens, resident aliens and their dependents, has been criticized roundly by the Treasury Department's office of the inspector general. It noted Thursday that while some corrective actions have since been taken, additional improvements still are needed.

In the newest report, J. Russell George, the Treasury Department's inspector general for tax administration, said that despite prior reports and congressional testimony urging changes, IRS management has not developed organizational processes and procedures to address potential fraud schemes, and that no action had been taken to analyze information from previously processed applications to identify those that might be questionable.

Mr. George also said his tax examiners were concerned that IRS management will reverse the revenue service's new focus of ensuring that only qualified people receive the tax credits.

The tax credits center around a document created by the IRS and known as the Individual Taxpayer Identification Number, or ITIN, which is issued to people not eligible for a U.S. Social Security card because of their illegal immigration status, but are required to file tax returns because they earned money in the United States.

In reports and congressional testimony dating back to 2009, the inspector general's office has warned the IRS that action was needed to ensure the proper use of the ITINs and to verify or limit refundable credit claims.

The reports and testimony noted that claims for additional child tax credits by those holding ITIN cards had increased significantly, jumping from $924 million in 2005 to $4.2 billion in 2011.

"I am pleased that the IRS has made significant progress addressing seven of the nine deficiencies that [the inspector general for tax administration] previously identified in the ITIN application program," Mr. George said. "Now, IRS officials need to address the remainder of our concerns."

Many people who are not authorized to work in the United States and, as a result, unable to obtain a Social Security card are given ITIN cards to facilitate their filing of tax returns for the wages they have been paid. Although the law prohibits aliens residing without authorization in this country from receiving most federal public benefits, an increasing number file tax returns claiming the additional child tax credit, a refundable tax credit intended for working families.

The ITINs are not valid identification outside the tax system.

The inspector general's office has steadfastly said the payment of federal funds through this tax benefit "appears to provide an additional incentive for aliens to enter, reside and work in the United States without authorization, which contradicts federal law and policy to remove such incentives."

Over the past four years, the inspector general's office has argued that clarification to the law is needed.

Some of the individual tax refund payments have ranged as high as $12,000 and several of the tax returns claimed as many as 10 to 12 nieces and nephews as dependent relatives, the vast majority of whom live in Mexico and Central and South America.

The IRS has said it agreed with most of the inspector general's recommendations and planned to evaluate implementing program changes as part of a "risk assessment that will not only determine the scope and associated costs but will also consider other controls and actions that can be implemented if the requested programming changes are not funded."

In its newest report, the inspector general's office said the ITIN application review and verification process had been so deficient there was no assurance that the nine-digit ITIN cards were not being assigned to persons submitting questionable applications.

It noted that the IRS had initiated corrective actions to address the majority of recommendations included in a prior audit report, and that the number of applications rejected as questionable increased from 226,011 for the period July through December 2011 to 340,659 for the same period in 2012.

But, the report said, problems continue and although the quality review process has been expanded, some changes could "inadvertently discourage tax examiners from identifying questionable documents."

Under federal law, the additional child tax credit reduces the tax low-income families pay by $1,000 for each child under 17. When the claim is greater than the amount of taxes owed, the IRS sends the filer a check for the difference. Little effort has been made to verify the existence of the claimed children.

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