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Issue Brief #3970 on Immigration

June 14, 2013

Senate Immigration Bill Does Not Require Payment of All Back Taxes

By

There are many serious flaws in the controversial Senate immigration bill, the Border Security, Economic Opportunity, and Immigration Modernization Act (S. 744). One such flaw is that it fails a standard of basic fairness to which immigration has long been held: It does not meaningfully require illegal immigrants to pay back taxes, interest, and penalties on all the income they earned while here in the U.S. illegally before being granted legal status.

Senators Charles Schumer (D–NY) and Lindsey Graham (R–SC), members of the “Gang of Eight” that wrote the latest immigration bill, affirmed the standard of illegal immigrants paying all back taxes in a 2010 Washington Post op-ed.[1] Regrettably, the bill that they helped write does not meet their own standard.

As long as the federal tax system is inflicted upon us, anyone who earns income in the U.S. should pay all taxes on that income. That includes federal income and payroll taxes and state and local taxes. This is just as true for today’s U.S. citizens as it is for immigrants, legal or otherwise. And there are substantive monetary consequences imposed on U.S. citizens for failing to pay all the tax that is owed that should apply equally to everyone earning income in the U.S.

Legislation Drafted Too Loosely

The immigration bill, as it currently stands after passage by the Senate Judiciary Committee, does not specify how tax authorities are to collect back taxes from illegal immigrants before they are granted legal status if they have not previously filed tax returns. Instead, it states on page 952, in proposed section 245B:

An alien may not file an application for registered provisional immigrant status…unless the applicant has satisfied any applicable Federal tax liability…the term “applicable Federal tax liability” means all Federal income taxes assessed in accordance with section 6203 of the Internal Revenue Code of 1986.

An applicant may demonstrate compliance with this paragraph by submitting appropriate documentation, in accordance with regulations promulgated by the Secretary, in consultation with the Secretary of the Treasury.[2]

This language may seem clear enough, but section 6203 of the tax code reveals the problem:

The assessment shall be made by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary. Upon request of the taxpayer, the Secretary shall furnish the taxpayer a copy of the record of the assessment.[3]

How is this assessment made? Section 6201 of the tax code provides guidance:

The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title, or accruing under any former internal revenue law, which have not been duly paid by stamp at the time and in the manner provided by law. Such authority shall extend to and include the following:

(1) Taxes shown on return

The Secretary shall assess all taxes determined by the taxpayer or by the Secretary as to which returns or lists are made under this title.[4]

The tax code gives the Treasury Secretary broad authority to determine the correct tax liability of someone who has filed a tax return. If an illegal immigrant filed a tax return every year, then the immigration bill gives the necessary authority to the Treasury Secretary to collect the appropriate back taxes owed.

However, the bill gives no instruction as to how the Secretary is to determine the tax liability of someone who has not filed a tax return. Many illegal immigrants work off the books for cash. They would not report that income to the IRS by filing a tax return. How the Secretary would collect back taxes on that unreported income is unclear.

IRS Would Likely Eschew Enforcement

The Treasury Secretary may have the authority to collect taxes on reported income under existing laws, but without further instructions in the immigration bill, it is not possible to know how the Secretary would interpret that authority as it pertains to assessing back taxes, interest, and penalties owed by illegal immigrants who did not file tax returns. Presumably, these illegal immigrants would likely account for the vast majority of illegal immigrants seeking legal status.

Most troubling, it is possible that the Treasury Secretary would waive the assessment process because of the difficulties illegal immigrants might face providing a full historical record of their income. If their employers paid them in cash, then the employer likely did not issue them a W-2 form and report their income to the IRS.

The likelihood of the Secretary absolving these non-tax compliant individuals is high because, by waiving the requirement to pay back taxes, Treasury, the IRS, and illegal immigrants themselves would escape the seemingly unsolvable burden of determining how much back taxes illegal immigrants owe.

The IRS is already terribly overburdened administering the existing federal tax system and implementing Obamacare. And the immigration bill leaves unaddressed whether the IRS would receive the necessary additional appropriations to carry out this latest daunting task.

The IRS is also devoting a large amount of its resources determining how and why some employees of the agency used its considerable power to target certain conservative nonprofit groups for extra scrutiny regarding their tax-exempt status. The IRS’s unpardonable politicization in this case calls into question whether the agency can handle the politically sensitive issue of collecting back taxes owed by illegal immigrants.

Hatch–Rubio Amendment an Improvement but Falls Short

Senators Orrin Hatch (R–UT) and Marco Rubio (R–FL) have proposed an amendment to the immigration bill that would make illegal immigrants responsible for proving to the Treasury Department and the IRS that they have paid their federal income and payroll tax liability before gaining legal status.[5] This moves the burden from the Treasury Department to those seeking legal status. It is a good start, but it falls short.

The proposal does not detail how those illegal immigrants without income documentation could determine their back tax liability. Rather, it still leaves that determination wholly up to the discretion of the Treasury Secretary. It could also be interpreted as giving the Treasury Secretary the ability to negotiate with illegal immigrants to relieve them of some or even all of their tax burdens instead of ensuring that they pay their income and payroll tax liability, including interest and penalties, in full.

Illegal Immigrants Could Still Be Eligible for Refundable Tax Credits

Left unaddressed in the bill is whether illegal immigrants who do pay back taxes and attain legal status would be eligible to claim refundable tax credits—specifically the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC)—that could give them cash payments. Current law precludes them from claiming EITC payments, because taxpayers claiming the credit and its refundable portion must have a legitimate Social Security number. The immigration bill, however, should make clear that illegal immigrants cannot use their legal status once granted to claim the credit for previous years that they were in the U.S. illegally.

The CTC is a bigger problem. The tax code does not require that taxpayers have a Social Security number to claim it. As a result, it is rife with fraud and abuse. Because it lacks the Social Security number requirement, illegal immigrants could claim it when they pay their back taxes. Congress should prohibit this in the immigration bill, since the CTC was always intended to help legal working families. Congress should also fix the loophole in the law that does not require a Social Security number to claim the CTC.[6]

Basic Issue of Fairness

The requirement to pay back taxes should be the same for illegal immigrants as it is for U.S. citizens. That is only fair, as citizens and immigrants in the country legally are responsible for paying these taxes. If they do not pay tax at the appropriate time and in the required amounts, the IRS and ultimately the courts will force them to pay what they legally owe and apply penalties and interest.

Members of the Gang of Eight know that their bill does not really require payment of back taxes, but they have refused to fix the problem—even though many in the group indicate that they support such a requirement. They have deemed the task too difficult.[7] There is little doubt that it is a tough issue, but that does not absolve the authors of such sweeping legislation from blame for writing a bill that does not meet a basic test of fairness.

—Curtis S. Dubay is a Senior Analyst in Tax Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundati



Show references in this report

[1]Charles E. Schumer and Lindsey O. Graham, “The Right Way to Mend Immigration,” The Washington Post, March 19, 2010,http://www.washingtonpost.com/wp-dyn/content/article/2010/03/17/AR2010031703115.html (accessed June 5, 2013).

[2]Border Security, Economic Opportunity, and Immigration Modernization Act, S. 744, § 245B.

[3]26 U.S. Code § 6203.

[4]26 U.S. Code § 6201.

[5]News Release, “Hatch, Rubio Unveil Amendments to Further Strengthen Immigration Bill,” Office of Senator Orrin Hatch, June 12, 2013, http://www.hatch.senate.gov/public/index.cfm/releases?ID=830489c1-b013-4d1f-9067-f1f7c365d355 (accessed June 14, 2013).

[6]See Curtis S. Dubay and Robert Rector, “Illegal Immigrants Should Not Receive Child Tax Credit Payments,” Heritage Foundation Issue Brief No. 3693, August 3, 2012, http://www.heritage.org/research/reports/2012/08/illegal-immigrants-should-not-receive-child-tax-credit-payouts.

[7]Rachel Blade, “GOP Immigration Supporters Face Back-Tax Dilemma,” Politico, June 3, 2013, http://www.politico.com/story/2013/06/gop-immigration-supporters-face-back-tax-dilemma-92124.html (accessed June 5, 2013). 

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