President Barack Obama’s executive order on immigration will allow people who’ve been working in the country without documents to retroactively file tax returns for the past three years and collectively get about $1.7 billion in refundable tax credits over 10 years.
It’s a little known consequence of the executive order on immigration announced shortly before Thanksgiving, and whose implementation is presently held up in the courts.
Republican lawmakers are scrambling to pass legislation that would limit the ability of the workers to file tax returns for years before their immigration status changed under the executive order and qualify for a tax refund that on average for other taxpayers has been about $2,300 per person.
Under Obama’s executive order, eligible workers would be given Social Security numbers, and that would allow them to work legally while the order is in effect. They could file a 1040 tax return, or amended returns for three years prior – the statute of limitations for amending a tax return – and potentially qualify for the refundable Earned Income Tax Credit.
“Those who were working illegally in the United States shouldn’t be rewarded for doing so,” Sen. Charles Grassley, R-Iowa, said in a statement to McClatchy. “That would have the effect of allowing retroactive benefits. My proposal would prohibit those granted deferred action from claiming the EITC for any year they were working without authorization in the United States.”
McClatchy obtained an estimate by the congressional Joint Committee on Taxation, done for Grassley and Senate Finance Committee Chairman Orrin Hatch, R-Utah. It shows the additional EITC refunds under the program could cost taxpayers $1.7 billion over 10 years, almost all of it in the first five years.
Obama’s immigration order overall is actually expected to bring in almost $20 billion in new revenue over a 10-year period after implementation, according to the nonpartisan Congressional Budget Office. That’s because new immigrants would be paying into Social Security and having taxes withheld from paychecks.
Repealing the order would add to projected deficits. But allowing previously undocumented workers to quickly collect a government check for a time when they weren’t here legally is hardly a good optic for Obama and Democrats.
The Earned Income Tax Credit was created to help move individuals off of welfare rolls and into employment. It provides a tax benefit to low-income earners based on what they actually earn. It is “refundable,” meaning workers who have no federal income tax liabilities get the balance of the credit in a check from the government.
Allowing the new immigrants to apply retroactively for the EITC is similar to green card holders being able to seek the credit when they get a Social Security number, as is the case now.
The Internal Revenue Service recently reviewed guidance dating to 2000 and upheld that the determining factor on getting the Earned Income Tax Credit refund is a Social Security number, not immigration status.
“The rationale is, if you were in the country and there is some process in which you become legal, we want to go ahead and treat you as if you were legal the whole time,” said Elaine Magg, a senior research associate for the nonpartisan Tax Policy Center, jointly run by the centrist Urban Institute and center-left Brookings Institution.
What Republicans blast as “amnesty bonuses” are also akin to what political refugees can now do under tax law – amend prior tax returns once their immigration status has changed.
But Grassley maintains Congress explicitly closed this avenue to undocumented workers in 1996 and argues that this is being ignored by the IRS.
“If we want these folks to be citizens then we give them Social Security numbers, and they are subject to the same tax laws others are subject to, and in some cases that will mean they will get the refundable credit,” said Maag, calling the issue easily fixable if Congress wants to restrict the ability to retroactively claim the tax breaks afforded in Obama’s executive order.
Bills already have been introduced in the House of Representatives and the Senate to do just that.
Undocumented workers presumably have been working off the books or with falsified documents. They will have to present proof that they were paid or were self-employed over the previous three years. If they were using a false taxpayer ID number, they could now amend returns for the past three years and plug in their new Social Security number.
The IRS could audit these returns to guard against fraud, but because the tax returns involve very low income levels, the IRS would not get much bang for the buck with such audits.
The Joint Committee on Taxation estimate is based on a model of expected behavior and not past actions, given that there hasn’t been a similar situation on which to build a best guess. It also does not estimate how many of the undocumented immigrants might have changed to legal status anyway through marriage or other avenues.