Dennis Sevakis examined the role of the IRS in enabling illegal aliens to file tax returns via the establishment of a program to provide Individual Taxpayer Identification Numbers, even citing the head of the Houston IRS office:

'We had to do something,' says Leandro Leon, education and communication director in the Houston IRS office. 'These undocumented aliens were working here, using bogus Social Security numbers, and not reporting their income.'

Rosslyn Smith, our contibutor and both a CPA and attorney, provides extremely valuable perspective on how the program came about, offering further lessons in the law of unintended consequences and the complexity of the juncture of taxation and immigration.

The program to issue Individual Taxpayer Identification Numbers (ITINs) was not established for illegal aliens. What happened was that a program initially meant to assist a very small segment of professional tax practitioners has been altered beyond recognition to raise revenue.  
 
The people who initially pushed for the ITIN system were those practitioners who served the foreign athletes, entertainers and executives who operated across national boundaries.  All these affluent individuals have an obligation to file a U.S. return if no income tax treaty exemption applies.  As the IRS became more automated, preparing tax returns for those who did not have a Social Security Number (SSN) became increasingly difficult.  Yet the IRS took a very long time to acknowledge that its traditional system for collecting income taxes from foreign nationals needed to change from the days when each person leaving the country was expected to declare their income on a  Form 1040C, Departing Alien Income Tax Return. a/k/a  'a sailing permit', and to pay the tax before they were allowed up the gangway onto the ship.  (In fact, Form 1040C an still be found on the IRS website, though I doubt many will be filed in 2006.) 
 
For example, in the mid—1980s, before the IRS would issue either permanent or temporary ITINs, I would engaged in voluminous correspondence trying to track income tax payments.  The Chicago Lyric Opera, careful to follow the letter of the law, would withhold and remit tax on the compensation of their independent contractors, those foreign divas, tenors and conductors who might grace their stage for two or three weeks per year before moving on to London, Paris and Milan.  When those artists filed their actual Forms 1040NR, U.S. Nonresident Alien Income Tax Return and claimed refunds based on business deductions against that compensation, the IRS would have no record of the tax payments that had been made on the artists' behalf.  The IRS system tracked withholding by Social Security numbers and these people had none for they had never been employees of a U.S. business but rather independent contractors who retained control over the artistic content of their performances.   Copies of the canceled checks from the Lyric with the notations that the remittance was for the non resident taxes of the given artist had to be provided. The IRS would then match the check with deposits into its suspense account for unidentified payments.  
 
Another impetus for issuing ITINs came when the IRS began requiring that dependents have Social Security numbers before it would allow an exemption to be claimed. During the same time, many other agencies, both public and private,  began to track a variety of information by SSN.  This meant that the British executive on an L visa working at the U.S. subsidiary of his British employer needed to get ITINs for his wife and children not just to file a joint return and claim his children as dependents, but also for such day to day concerns such as applying for a gas credit card for his wife and enrolling the children in the school system.
 
Last fall I prepared my first Form W—7 in three years and was surprised by the changes in the form and instructions.  When Form W—7, The Application for IRS Individual Taxpayer Identification Number first came out, ITINs had to be obtained before any tax return or payment would be accepted by the IRS.  It has only been in the last couple of years that the IRS has changed the instructions to provide that in most situations the return itself has to be filed with the ITIN application.  The exceptions are those situations where the ITIN is required by a third party, such as U.S.bank or because a foreign investor is investing in a U.S. partnership. 
 
Neither were those early Forms W—7 headed by a warning that 'getting an ITIN does not change your immigration status or our right to work in the United States and does not make you eligible for the earned income credit.'   I don't seem to recall this instruction under the heading 'U.S resident alien (based on days present in the United States)',  either.  'A foreign individual who does not have permission to work from the USCIS, and is thus ineligible for an SSN may still be required to file a U.S. Income Tax return.' 
 
Another major change is the instruction that says an alien taxpayer can file an extension and make estimated tax payments without an ITIN if they also placed the phrase 'ITIN to be requested' on those payment coupons.  Several years ago, I learned in March that the foreign parent of a U.S. client corporation had sent about 50 engineers to the United Sates when a problem came up on an assembly line.  Perhaps a dozen of these employees of the foreign parent corporation ended up having to stay in the United States beyond the 180 days per year allowed under the applicable tax treaty in order to fix the quality control problem.  That meant those foreign nationals now had a U.S. tax return filing obligation.  To avoid penalties and interest, we tried to pay the tax on April 15 while the applications for their ITINs were pending. The IRS flatly refused to accept the payments without ITINs.  
 
Finally the instructions to the Form 1040NR, U.S. Nonresident Alien Income Tax Return have also changed, even though the return itself is pretty much the same.  When I began working in this area of taxation, the instructions contained no language about how to report wages earned as a household employee that were not shown on a Form W—2 and unreported tip income.
 
Thus a small service program aimed at making life easier for the accountants who served foreign executives,  high income foreign individuals with investment vehicles in the United States, entertainers and pro athletes seems to have been converted into one geared towards collection income taxes from illegal aliens.