In testimony before the Senate Homeland Security Committee, Eileen J. O’Connor, a tax lawyer and the former head of the tax division of the United States Department of Justice, revealed that illegal aliens may be able to receive a substantial cash payment, an “amnesty bonus” as Senator Ben Sasse put it, under President Obama’s deferral of action on immigration enforcement. Daniel Halper in The Weekly Standard writes:

“The law makes a social security number a requirement of eligibility to receive the earned income credit,” O’Connor explained.

“But in 1999, the Chief Counsel’s office of IRS ruled (in a non-binding, non-precedential way, but no one but the IRS pays attention to those disclaimers) that when a person receives a social security number, he can file amended returns to claim the credit for the three preceding years during which he did not. The logic is puzzling: the credit is not available if you don’t have a social security number, but you can receive it retroactively for years during which you did not qualify for it because you didn’t have a social security number.”

Illegals, especially those with children, may be able to file amended tax forms for 3 years prior to the amnesty stroke of the pen.  If allowed, this would result in the nearly immediate payout of billions of dollars in tax refunds from the federal government to those granted amnesty.

It is widely assumed that a majority of those illegally in the United States do not file or pay federal income taxes.  Most work for cash, and many others work using fictitious or stolen social security numbers.  Even when a false or fictitious Social Security number is used, generally no income taxes are ever withheld and remitted to the IRS because these individuals are working as independent contractors.  This is particularly prevalent in the vast array of construction jobs performed by many illegals including painting, roofing, dry wall installation, and other general contracting activities.  It is also prevalent in the various landscaping and agricultural trades.

But for those individuals who properly obtained ITIN tax numbers from the IRS (because they were foreign nationals who did not qualify for a Social Security number but had a federal tax obligation), the potential for immediate tax refunds would be quite sizeable.

As a result of Obama’s executive actions, millions of illegals will be granted Social Security numbers.  Once received, this would be the catalyst to trigger an onslaught of amended, and likely fraudulent tax filings.

Under the US Tax code, an individual is allowed to file an amended tax filing up to three years after the filing deadline, which is normally April 15^th.  If a tax extension was filed, this deadline would be pushed back to October 15^th.

Consequently, once a Social Security number is issued, an illegal would theoretically be able to file a tax return and receive a refund for calendar years 2011, 2012, and 2013 by April 15, 2015, even if no prior tax return was filed.   Moreover, because the vast majority of illegals have no income tied to any type of actual income document (such as a W-2 form, 1099-Misc, etc.) and because payment was often received in cash, it would be impossible for the IRS or any of their agents to verify the amount of income declared.  Thus, for an unscrupulous individual, the ability to claim they "earned" cash without any verification would be nearly limitless. 

Moreover, by issuing Social Security numbers to an estimate 4-5 million individuals, there would be no control to prevent an individual from declaring they earned (in cash) a precise amount so as to maximize one’s tax refund from either the EITC credit, the ACTC credit, or both.   

Regardless on one’s filing status, for an individual with three or more children, the refundable EITC can be as large as $6,143.  The only variable is the amount of income the individual may earn.  For a single person or the head of household, this refund level is reached with modified adjusted gross incomes between $13,650 and $16,000.  For a person filing married and jointly, the income range is $12,800 to $20,100.

Accordingly, it would be possible for an individual to declare cash income from independent contract work totaling $13,651, claim they had 3 children (and it’s debatable if any control would exist to verify if the children were real or living in the United States), and receive most of the $6,143 as cash payment from the US Treasury. 

Under this scenario, no actual income taxes would be owed as the value of a single filer’s standard deduction ($6,200) plus at least for four personal exemptions ($15,800 total, $3,950 for each of the four dependents) would far exceed total income.  Although Self-Employment taxes would still be owed on the “cash” income, the amount of SE Tax owed (estimated at $1,929) would be significantly less than the EITC refund.  Moreover, because no income tax was actually owed and because a refund is now due, the IRS cannot assess a failure to file penalty.   Accordingly, a refund of $4,214 would be due to the newly amnestied tax filer.

By replicating this process not only in the current year but in the prior three tax years, it is conceivable that most of those granted amnesty would receive total refunds of between $6,000 and $17,000 just from the EITC credit thanks to President Obama’s pen stroke.

For those who filed taxes legitimately with an ITIN number, all income taxes and self-employment taxes have already been remitted to the federal government.  However, until the issuance of a social security number, these filers had no ability to claim the EITC or ACTC Credit.  Accordingly, once a social security number is issued, the ability for an ITIN holder to file an amended return and claim the maximum allowable EITC credit ($3,305 to $6,143) would be permissible.  Again, replicating this process in the current year and the prior three tax years, immediate tax refunds of $13,220 to $24,572 would be possible.

Given the rampant reports of ACTC fraud totaling at least $7 billion in fraudulent refunds in 2013 alone (primarily to holders fictitious ITIN numbers issued by the IRS), Obama’s political gesture to grant amnesty to millions of illegal aliens has created a new avenue for the further fleecing of the American taxpayer.  Let us hope that our leaders in Congress heed this warning before we further enrich those who have already brazenly broken our federal immigration and federal employment laws.

Paul B. Matthews is a Texas-licensed Certified Public Accountant (CPA) and a CFA charter holder.  He can be followed on Twitter at @Paul4TexasHouse.