Representing Undocumented Workers
In the United States there are around 10.5 million undocumented immigrants, who in total contribute around 10.6 billion dollars in taxes every year. However, of these 10.5 million only about half of them are filing income tax returns. Many fail to file out of fear or simply do not know they have the option or obligation. By filing tax returns, immigrants gain access to tax credits and can help prove their moral character in immigration proceedings. States like New York, California, and Maryland have recently been moving toward opening more benefits to undocumented workers, especially due to the negative impacts of the pandemic.2
Anyone who earns income in the United States, must report that income on their tax return, regardless of legal status. A resident alien has the same tax obligations as a U.S. citizen including the requirement to report worldwide income. The difference between a resident and nonresident alien will be fully explained later, but for now we will discuss how one files without a social security number.
The U.S. tax system allows for undocumented workers, or anyone without a social security number, to obtain an Individual Taxpayer Identification Number (“ITIN”). This article will cover the procedure for a noncitizen to become a taxpayer, then the major privacy concerns involved with giving the government sensitive information and finally, the tax benefits and credits available to noncitizens.
1. The Individual Taxpayer Identification Number (ITIN)
In 1996, the Internal Revenue Service (the “IRS”) created the Individual Taxpayer Identification Number or ITIN, for undocumented workers and other individuals who are not eligible for social security numbers to comply with the tax laws of the United States.3
The ITIN is limited in its purpose, it does not authorize the holder to work in the U.S., only to pay taxes.4 The ITIN allows for more individuals to participate in the tax system. According to data from 2015, about four and a half million people paid $24 billion in total taxes using an ITIN. 5
The IRS provides a list for determining whether an ITIN would be required based on an individual’s status in the U.S. An individual needs an ITIN if they: 1) do not have an SSN and are not eligible to obtain one; 2) has a requirement to furnish a federal tax identification number or file a federal tax return, and 3) is one of the following categories: (i) nonresident alien who is required to file a U.S. tax return ; (ii) U.S. resident alien (based on days present in the United States) filing a U.S. tax return; (iii) dependent or spouse of a U.S. citizen/resident alien; (iv) dependent or spouse of a nonresident alien visa holder; (v) nonresident alien claiming a tax treaty benefit; or (vi) nonresident alien student, professor, or researcher filing a U.S. tax return or claiming an exception.6 Undocumented workers must use an ITIN to pay taxes when they cannot get a social security number.
To apply for an ITIN, an individual must submit IRS Form W-7, Application for IRS Individual Taxpayer Identification Number. 7 The Form requires that the individual prove their immigration status and true identity.8 There are a few ways to submit the Form for it to be properly processed. First, one can mail the Form along with documentation on their legal status to the address provided on the Form.9 Second, an individual can bring the form into an IRS walk-in office.10 As list of such offices can be found on the IRS website.11 Finally, a Form W-7 can be submitted through an Acceptance Agent.12 This method is primarily used by individuals residing outside the United States.13 Acceptance Agents are typically entities like colleges, financial institutions, or accounting firms authorized by the IRS to assist individuals applying for the ITIN.14 These agents can be located via a database on the IRS website.15
ITINs are not evergreen and will need to be renewed occasionally by resubmitting another form W-7.16 An ITIN will expire if it is not included on a U.S. federal tax return at least once in the last three consecutive years.17 Also, any ITIN issued before 2013 will expire based upon an annual schedule determined by the middle digits of the ITIN as detailed in I.R.C. § 6109(i)(3)(B).18
II. The ITIN and Protection for Undocumented Taxpayers
For an undocumented worker, volunteering information to the government may seem like putting a target on their back. Thus, it is imperative to explain that the ITIN itself is not used for immigration and there are important privacy protections for return information codified in the Internal Revenue Code (the “Code”).19 Generally, the IRS may not release taxpayer information to other federal government agencies unless there is a specific exception.20 For example, an exception allows the IRS to share information within the Department of Treasury for investigations regarding tax administration.21 That extends to the Department of Justice for grand-jury proceedings and proceedings before a federal or state court.22 Most important is that the statute does not provide exceptions for agencies with jurisdiction over immigration such as the Department of Homeland Security or Immigration and Customs Enforcement Agent (ICE).
III. When to file a federal income tax return using an ITIN
All wage earners, regardless of their legal status, must file a federal tax return if they meet a certain economic threshold.23 The threshold for filing is determined by the amount an individual or couple, if filing jointly, has earned over the calendar year.24 Any undocumented worker considered a resident alien, has the same tax obligations as a U.S. citizen, including worldwide income.
Procedurally, filing a tax return using an ITIN is like filing a return using a social security number. Federal tax returns are typically due by April 15 after the taxable year, but the deadline may be extended automatically by filing Form 4868, Application for Automatic of Time to File U.S. Individual Income Tax Return.25
The Code only mentions two categories of noncitizens: (i) resident aliens and (ii) nonresident aliens.26 In an attempt for clarity, the IRS has codified the standards for determining the residency status of taxpayers when filing a return with 27 an alien individual is treated as a resident with respect to any calendar year if the individual meets the requirements of one of the following tests: 28
1. Substantial Presence Test – an individual meets the test if (i) they were present in the United States for at least 31 days during the calendar year; (ii) the sum of the number of days that the individual was present in the U.S. during the current year and the 2 preceding calendar years (when multiplied by the applicable multiplier according to the table below) equals or exceeds 183 days:29
In the case of days in:
The applicable multiplier is:
1st preceding year
2nd preceding year
Typically, if the taxpayer has met any of the standards established above, then they should file federal income tax returns using IRS Form 1040. However, if the taxpayer has not established residency in the U.S. and plans on filing a return, they should file using IRS Form 1040 NR or 1040 NR-EZ.
IV. Filing Status for an ITIN holder and Income Subject to Taxation
When filing a return as an undocumented worker, there are limitations when filing with a spouse. For example, if a U.S. citizen is married to a nonresident alien, they cannot qualify as the head of household for the head of household tax rates. 32
The citizen taxpayer is considered unmarried for head of household purposes if their spouse was a nonresident alien during the year and the taxpayer does not treat their nonresident alien spouse as resident alien.33 The citizen taxpayer may, however, qualify for as a head of household is there is another eligible dependent or if one of the following applies:
2. Taxpayer paid more than half the cost of keeping up the home in which he or she lived and in which one of the following also lived for more than year: (i) unmarried child, grandchild, stepchild, foster child, or adopted child-foster child will qualify the taxpayer if they can be claimed as a dependent; (ii) married child, grandchild, stepchild, or adopted child whom the taxpayer can claim as a dependent, or whom the taxpayer could claim as a dependent except that the taxpayer signed a statement allowing the noncustodial parent to claim the dependent, or the noncustodial parent provides at least $600 support and claims the child under a dependent under a pre- 1985 agreement.34
If a citizen elects to treat their nonresident spouse as a U.S. resident and files a joint return, then the return must include all worldwide income.35 Although the joint filing subjects the taxpayer’s worldwide income to tax, there are benefits to electing this option. The main benefit being the “married filing jointly” status has a higher standard deduction than the “married filing separately” status.36 Ultimately, the filing status of a noncitizen will affect the income subject to taxation in the U.S.
V. Available Credits for ITIN Holders
While using an ITIN to file income tax returns does not grant the breadth of credits and deductions allowed for individuals using a social security number, there are still a few credits available to resident and nonresident aliens that file using an ITIN. The following list, although not exhaustive, briefly explains some of the frequently utilized credits for ITIN holders with qualifying dependents.
Many of these credits were limited by the Protecting Americans From Tax Hikes (PATH) Act of 2015.37 The PATH Act limited the eligibility of the Child Tax Credit (CTC), the American Opportunity Credit (AOC), and Credit for Other Dependents (COD) to taxpayers whose ITIN was issued by the date of filing.38 The effect of the PATH Act primarily applied to holders of newly issued ITINs and essentially prohibited retroactive filing for credits for returns due before issuing the ITIN.39 However, there are some tax credits available to ITIN holders.
Certain elements of these credits have been expanded upon with the passing of the American Rescue Plan Act (Rescue Plan)40 in early March 2021. Specifically, the Rescue Plan expanded the Child Tax Credit for 2021 and created a new statute that allows for advance payments of the credits.41
A. Child Tax Credit
The Rescue Plan has expanded the Child Tax Credit (CTC) for the year 2021. This expansion increases the credit amount from $2,000 to $3,000 for most children with an exception for children below the age of six.42 That exception increases the credit amount even more to allow for $3,600 per child below the age of six.43 Additionally, the CTC for 2021 was amended to include dependents 18 years of age, moving beyond the previous limitation of 17 years old.44
The Rescue Plan also has increased the earning threshold for individuals who would qualify for the CTC for 2021 and made the entire credit refundable for all taxpayers and families that qualify.
The Rescue Plan has also created a new Code section allowing for advancements of the Child Tax Credit for individuals claiming a qualified child under the age of six.45 Essentially, this will allow low-income families to reap the benefits of the CTC credit for 2021 without having to wait until the 2022 tax season like other tax credits. This will send funds directly to qualifying taxpayers in equal sums that, in the aggregate, will be the full benefit of the credit. This plan is set to be implemented in July 2021 and continue until December 2021.
The Child Tax Credit is available to individuals whose children have valid social security numbers, with the tax credit being claimed for each eligible child, determined by age.46 For a child to be eligible they must be the taxpayer’s son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a decedent of any of them. 47 This expands the credit beyond a taxpayer’s children and applies more broadly to a relative that is a dependent of the taxpayer. 48 A qualifying child must be below the age of 18, have lived with the taxpayer for more than half of the calendar year in which the credit is being claimed, and must not have provided over half of his or her own support for the year. 49
To claim the CTC, the taxpayer must enter their ITIN and the social security number of their children or actable relative on Schedule 8812 of their return. 50 The child’s social security number is imperative, and the taxpayer cannot use the child to claim on any return for that calendar year if they do not have one.51
B. Credit for Other Dependents (ODC)
The Credit for Other Dependents (ODC), is available to taxpayers who meet all the criteria for the CTC besides the child dependent having a social security number.52 The credit allows for a $500 credit to be applied to qualified dependents according to the Code.53 The person being used to qualify for the credit must be a dependent on the taxpayer’s return.54 And the claimed dependent without a social security number must be a resident alien, and the taxpayer may not use the same dependent for both the ODC and CTC.55 For example, the taxpayer has a 10-year-old nephew who lives in Mexico, and qualifies as the taxpayer’s dependent, but is not a U.S. citizen. The nephew cannot be used to claim the ODC because he is not a citizen, national, or resident alien. If the nephew moved to the U.S. as a resident alien, then it would be possible to claim the ODC, but not while the nephew lives in Mexico.56
The ODC allows the taxpayer to claim a minimum credit of $500 per qualified dependent which may be reduced if: (i) the amount owed is less than the total of both credits or: (ii) if the taxpayer’s modified adjusted gross income is more than $400,000 if married filing jointly or $200,000 for any other filing.57
C. Childcare and Dependent Care Tax Credit
ITIN holders are eligible to claim the Child and Dependent Care Tax Credit. This credit was put in place to help working people offset the costs of childcare or care of a disabled dependent and the credit can be claimed regardless of income.58 The amount will be determined by an “applicable percentage” of the “employment-related expenses” paid by the taxpayer during the taxable year.59 The "applicable percentage" means 35 percent reduced by 1 percentage point for each $2,000 by which the taxpayer’s adjusted gross income for the taxable year exceeds $15,000, but not below 20 percent.60 The reduction based on the individual’s adjusted gross income can be a fraction of a percentage point e.g. if the earner made $16,000 for the taxable year, the reduction would be .5%.61 However, there is a limitation on the amount that an individual can take on their return.62 The “employment-related expenses” cannot exceed $3,000 dollars if there is one individual requiring care or $6,000 with two individuals.63 The amount is then reduced by the aggregate amount excludable from the gross income for the taxable year. 64
The Credit can only be claimed when the care provided is necessary for the taxpayer to remain gainfully employed.65 Further, the care must either take place within the taxpayer’s home or at a care center in full compliance with state laws and regulations.66 When the taxpayer claims this credit, they must also provide their social security number or ITIN of the person or non-profit entity providing the care. 67 If the taxpayer fails to include the required information about the caregiver, then they may not claim the credit.68 Additionally, the Code requires that the taxpayer provide the identifying number, either the Social Security number of ITIN, of the qualifying individuals to qualify for the credit.69
D. American Opportunity Tax Credit
The American Opportunity Tax Credit is worth up to $2,500, and its purpose is to help reduce the economic burden of college tuition on families and incentivize individuals to pursue higher education.70 For an individual attempting to claim the credit, they must be a resident alien under the physical presence test or be treated as such via an election by the taxpayer. 71 This credit is also limited to individuals that fall below a certain adjusted gross income level. 72
Qualifying for this credit requires that the taxpayer provide information for the student being supported by the taxpayer and the employer identification number of the educational institution to which the taxpayer has paid regarding the qualified student.73 This also means that the individuals paying the tuition must show proof of payment to the institution. In Harris v. Commissioner of Internal Revenue, the tax court upheld a disallowance of the tax credit due to the taxpayer’s failure to provide any proof of payment to the school. 74 Like most deficiency judgments, the burden is on the taxpayer to show a miscalculation of the amount owed and the taxpayer should maintain all necessary records.75
The student too, must comply with requirements imposed by the Code. The Code states that the credit is allowed for the first four completed years of postsecondary education for qualified tuition and expenses.76 For example, in Pemberton v. Commissioner of Internal Revenue, the petitioner was not eligible for the tax credit because he could not show he had completed less than four years of postsecondary study.77
E. Limits on Benefits: Social Security and Earned Income Tax Credit
ITIN holders are not eligible for every tax benefit and public benefit that U.S. citizens and other taxpayers can receive. For example, an ITIN holder without a social security number is not eligible for Social Security benefits. “However, if that person becomes eligible for Social Security "for example, by becoming a lawful permanent resident, the earnings reported with an ITIN may be counted toward the total amount he or she is eligible to receive.”78 Ultimately, an undocumented worker seeking to become a U.S. citizen might reap the benefits of Social Security administration for the income paid into it even before becoming a citizen. 79
The Earned Income Tax Credit (EITC) is slightly different. 80 An ITIN holder on their own is ineligible to receive the credit. 81 The EITC was created as a benefit for low- and median-income earners with social security numbers.82 For example, a single individual using an ITIN will never be eligible for the EITC because there must be a spouse or child with a social security number for the credit to be available. 83 If either a taxpayer or their spouse is a nonresident alien for any part of the year, then they are not eligible for the EITC unless it is a joint filing and the nonresident alien is treated a U.S. resident for tax purposes. 84
Additionally, nonresident aliens cannot claim the Economic Impact Payment distributed due to the pandemic.85
These benefits are severely limited for ITIN holders and claiming the mentioned credits erroneously could lead to other issues. The IRS provides checklists for all credits and instructions on how to claim them. They also describe the results of filing a false return or claiming credits that the taxpayer should not claim.
F. Improper Claims
With each of the mentioned tax credits, there comes a risk when claiming a credit which an individual is not eligible to claim. There are statutory penalties associated with falsely claiming credits that vary depending upon the severity of the error. 86 Publication 972 states that:
If you erroneously claim the CTC, ODC, or ACTC [Additional Child Tax Credit] even though you are not eligible for the credit, and it is later determined that your error was due to reckless or intentional disregard of the CTC, ODC, or ACTC rules, you will not be allowed to claim any of these credits for 2 years. If it is determined that your error was due to fraud, you will not be allowed to claim any of these credits for 10 years. You may also have to pay penalties.87
And if there was a denial of a claim for a particular credit or if the amount claimed was reduced by the IRS, then the taxpayer must submit Form 8862 Information to Claim Certain Credits After Disallowance, along with their tax return to claim the mentioned tax credits. 88 When dealing with a client that may have filed an improper claim erroneously, it is imperative to determine whether they fall under an exception as provided in Form 8862.
VI. Establishing “Good Moral Character” and Immigration Benefits of Filing a Tax Return
Beyond the tax benefits for undocumented workers who file federal tax returns, broader benefits accompany filing a tax return. Many undocumented workers that get paid “under the table” for their work are less likely to pay taxes, but there are many others that file their tax return hoping it will help them become citizens. 89
When residents apply for citizenship in the United States, one of the many requirements is that the individual is of “character which measures up to the standard of average citizens of the community in which the applicant resides.”90 Most examples of good moral character come from an absence of “crimes of moral turpitude” such as homicide, spousal abuse, fraud, and various others.91 When challenging removal in immigration court an undocumented worker or resident alien must establish good moral character affirmatively rather by omission. 92
A. The Process of Removal
The first thing to recognize about the issue is that removal is merely an updated term for deportation.93 This process typically occurs in one of four ways: (1) an individual is stopped and arrested by a Border Patrol Agent (CBP) or Immigration and Customs Enforcement Agent (ICE); (2) local law enforcement gives arrest information to ICE; (3) The United States Citizenship and Immigration Service (USCIS) denies an application for immigration status or; (4) a person seeks to enter the U.S at a border crossing.94
The next step for the government is to determine whether a removal case should be started in immigration court, whether the person should be given an expedited removal order, or whether the individual is subject to a prior remove order that should be enforced.95 An expedited removal occurs when an individual is arrested at the border and has not attained a visa or immigration status and, therefore may be deported within hours of arrest without being heard in front of a judge.96 Ultimately, the government wields the majority of the power in this process, but the individual may make a showing of good moral character even after a removal order is finalized in immigration court, this procedure is called a cancellation of removal. 97
B. The Nexus of Immigration and Tax Law in the Cancellation of Removal
Within the statute authorizing the cancellation of removal orders, there are two categories of cancellation accompanied by two different standards.98 For our purposes, the focus will be on the second standard which encompasses the requirements for an undocumented worker that may be subjected to removal. 99 The statute grants the Attorney General the discretion to stay a final removal for a nonpermanent resident if: (i) the person has been in the U.S. continuously for ten years; (ii) has been a person of good moral character during the time they have resided in the U.S.; (iii) has not committed a crime involving moral turpitude and; (iv) has shown that removal would cause “exceptional and extremely unusual hardship” to a citizen-relative of the person subject to deportation.100
Payment of federal taxes by a non-lawful resident can assist in the assertion that an individual has good moral character. Conversely, a finding of good moral character may be barred if the individual has failed to file their required tax returns while in the U.S.101 The government has increasingly been using findings or allegations of civil tax offenses as grounds to deny an applicant required good moral character.102 Tess Davis writes,
Tax offenses are relevant to immigration not only because they are illegal or because they involve fraud or deceit, but because they represent a breach of the basic benefit/burden agreement between the State and its citizens; because noncompliance with tax harms the “good order” of the sovereign and all its citizens.103
Thus, having tax returns may be useful during the application for cancellation of removal. The Department of Justice’s executive Office for Immigration Review suggests supplementing the application with documents to show good moral character, including among the suggested documents, evidence of tax compliance.104
For undocumented workers with a desire to become a naturalized citizen, filing their tax returns is effective in showing positive aspects of their potential citizenship and removing the ability of the government to use failing to file a return against them.
VII. Employers and the ITIN
The ITIN does not confer work authorization to the individual who holds it.105 Instead, it is an I- 9 that confers work authorization to a noncitizen individual. For employers, though, there are different issues to deal with when hiring individuals who are not citizens. According to the IRS and the Code, an employer must provide every employee’s name and social security number on Form W-2.106 This is to ensure that the Social Security or Medicare taxes are withheld from the employees who hold a social security number.
This limitation of the ITIN and the requirement of an I-9 or W-2 affects the employment of an undocumented worker and typically leads to many noncitizens being paid under the table. This creates a liability concern for employers who violate the visa and work authorization requirements. For example, civil and criminal penalties for employers who violate those requirements are enforced by ICE. 107
Before 1986, there was little risk in hiring an undocumented worker. The worst consequence was that the individual may get deported, but the employer faced no major repercussions. As immigration policy changed over the years so did the consequences of hiring undocumented workers without proper paperwork like an I-9. As of 2012, the government has developed a “comprehensive worksite enforcement strategy.”108 This strategy focuses on two areas. The first area is on worksites that represent “critical infrastructure” such as airports, seaports, power plants, and defense facilities among others.109 The second area encompasses employers who abuse and exploit undocumented workers.110 There are numerous examples of the second area, such as a raid targeting chicken processing plants and various other agricultural processing facilities.111
Employers who fail to properly report noncitizen employees using Form I-9 or knowingly hire undocumented workers, could face monetary penalties ranging from at least $375 per unauthorized worker for first-time offenders to a maximum of $1,600 per worker for a third or subsequent offense.112
Employers with undocumented workers who file tax returns will need to file W-4 forms as one would normally. For resident aliens the W-4 form is filled out and applied as one would do so for a U.S. citizen. A resident alien must report and pay tax on their worldwide earnings as well, which is often relevant to undocumented workers who might have revenue sources outside of the United States. The specifics of how to file that income may vary depending on the tax treaties the U.S. has entered with that nation. All U.S. income must be filled for taxation. For nonresident aliens however, specific formulas must be followed as listed in Publication 15-T, published by the IRS.113 This IRS publication sets out how much an employer must withhold from a nonresident alien’s payment for tax purposes.114
Understanding the taxation system of the United States can be complicated and stress-inducing for anyone. As an immigrant entering the U.S., understanding your tax obligations can be nearly impossible, and the Internal Revenue Service does not make the process any easier. Communicating the importance of filing taxes as an undocumented worker should not be overlooked particularly when the benefits encompass more than just a tax refund. Advising an undocumented worker on tax issues should begin with the application for an ITIN through Form W-7. Knowing your clients’ status is imperative to effectively counsel them on their obligations to file and eligibility for any tax credits mentioned above. Understanding their family dynamic, too, will decrease the possibility of filing any improper claims when claiming tax credits and having to deal with the consequences. One way the Internal Revenue Service can encourage undocumented workers to participate in the U.S. tax system is by communicating with them in their native language by updating the ability to alter the language preference in a more effective way for those who do not speak English as their native language. To help alleviate this issue the IRS office of Equity, Diversity & Inclusion has created an FAQ for Language Access for Taxpayers with Limited English Proficiency. This FAQ will be helpful to tax professionals when they are dealing with those who have limited English skills and can smooth the process.115
Matthew Rego, Attorney
Matthew Rego is an associate attorney at Agostino & Associates, Hackensack, NJ. The author thanks Jay Clinton and other attorneys and associates at Agostino & Associates for contributions based on their representation of undocumented workers in tax controversies.