IRS Rules Opened Back Door For Illegal Aliens To Enter U.S. Credit Market
By Tiffany Gabbay

( – Internal Revenue Service rules have opened up a back-door through which illegal immigrants can obtain an Individual Taxpayer Information Number (ITIN), which in turn helps them enter the U.S. credit market.

The IRS uses ITINs to process tax payments owed by people who are not eligible for a Social Security Number. It is issued regardless of immigration status to people living both inside and outside the country.

Although the IRS states explicitly that ITINs are not to be used for any purpose other than tax administration, banks across the country are accepting ITINs to open new accounts and extend lines of credit to customers who are not eligible for a Social Security Number.

When asked by whether or not ITINs are being used by people for purposes other than tax filing, Dean Patterson, a spokesman for Internal Revenue Service (IRS), told “If a third party accepts an ITIN, we can’t speak to that.”

Patterson directed to the IRS Web site, which contains pertinent information about the ITIN application process. An IRS Web page on frequently asked questions about the ITIN says:

“ITINs are issued regardless of immigration status because both resident and nonresident aliens may have U.S. tax return and payment responsibilities under the Internal Revenue Code.”

It also says:

“ITINs are not valid identification outside the tax system. Since ITINs are strictly for tax processing, IRS does not apply the same standards as agencies that provide genuine identity certification. ITIN applicants are not required to apply in person, and IRS does not further validate the authenticity of identity documents. ITINs do not prove identity outside the Federal tax system, and should not be offered or accepted as identification for non-tax purposes.”

A brochure that is posted on the IRS Web site as a PDF – titled “Understanding Your IRS/Individual Taxpayer Identification Number ITIN” – expressly instructs illegal aliens that they are eligible to get ITINs.

A section on page 9 of the brochure carries the heading: “Can I get an ITIN if I am an undocumented alien?” The text for this section reads:

“Yes, If you are required to file a U. S. Federal income tax return or qualify to be listed on another individual’s tax return as a spouse or dependent, you must have either a valid SSN or an ITIN. If you are an undocumented alien and cannot get a SSN, you must get an ITIN for tax purposes. Remember, having an ITIN does not:

— Give you the right to work in the United States,
— Change your immigration status, or
— Entitle you to the Earned Income Tax Credit or Social Security benefits.”

The General Accounting Office (now called the Government Accountability Office), which audits federal agencies on behalf of the United States Congress, has noted the problem of illegal aliens receiving ITINs from the IRS.

On March 10, 2004, Michael Brostek, GAO’s director of tax issues, submitted testimony to the House Ways and Means Subcommittee on Oversight and Social Security in which he noted the widespread use of ITINs by illegal aliens.

“IRS has concluded that most resident aliens who have ITINs and earn wage income are not legally employed in the United States,” Brostek told Congress.

“IRS and TIGTA (Treasury Inspector General for Tax Administration) have concluded that many of the taxpayers who file tax returns with ITINs are illegal resident aliens. Although estimates are not precise, according to TIGTA, hundreds of thousands of the tax returns filed with ITINs each year likely involve employed illegal resident aliens,” Brostek testified.

Brostek reported that since the IRS started issuing ITINs in 1996, the number of them in circulation has exploded. “IRS has issued over 7.2 million ITINs through December 2003 and over 1 million ITIN annually in more recent years,” Brostek said in his written testimony.

On July 11, 2006, Brostek joined with Barbara Bovbjerg, GAO’s director of education, workforce and income security issues, and Richard Stana, GAO’s director of homeland security and justice issues, in presenting a written briefing to Congress on immigration enforcement issues. One of the topics they discussed was the proliferation of IRS ITINs among illegal aliens.

“About 530,000 ITIN holders submitted tax returns with wage income in 2001,” said the briefing. “IRS officials believe that almost all returns filed with ITINs claiming wages are from unauthorized workers.”

Patterson explained that the IRS has introduced revisions to the ITIN application process in order to ensure its use for tax purposes only.

The revised application standards for ITINs require the completion of the new ITIN application form (or W7 form) accompanied by a federal income tax return. However, the new process also offers exemptions from these two requirements if documentation is provided. Bank requests for ITINs are among the accepted pieces of documentation making one eligible to claim exemption.

The W7 Form reads:

“Frequently, third parties (such as banks and other financial institutions) which are subject to information reporting and withholding requirements, will request an ITIN from you to enable them to file information returns required by law. If you are requesting an ITIN for this reason, you may be able to claim one of the exceptions described below.”

The section of the form explaining the “exceptions,” includes one for people who are “‘resident aliens’ for tax purposes.” It lists among those eligible for an exception:

“1(c) Individuals who are ‘resident aliens’ for tax purposes and have opened up an interest bearing bank deposit account that generates income subject to IRS information reporting and/or federal tax withholding.”

The fact that there is a difference between a “resident alien” for tax purposes and a resident alien for immigration purposes is spelled out in detail in another IRS publication called “Foreign Student and Scholar Text (for use in preparing Tax Year 2007 Returns for Nonresident Aliens).” It says that “undocumented aliens” are treated as “resident aliens” under the tax code.

“U.S. immigration laws speak of immigrants, non-immigrants (also called nonresident aliens), and illegal aliens (undocumented aliens), but U.S. tax laws speak of resident aliens and nonresident aliens,” explains this IRS document (bold text in original).

“The basic facts to remember about taxation of aliens are that resident aliens are taxed like U.S. citizens, while nonresident aliens are taxed differently. The tax law applicable to aliens – although based on U.S. immigration law – defines residency for tax purposes differently from how it is defined in immigration law,” says the IRS document. “Under the Internal Revenue Code, even undocumented aliens (sometimes referred to as ‘illegal aliens’) are treated as resident aliens if they meet the ‘substantial presence’ test in the tax code.”

To qualify as a “resident alien” as far as the IRS is concerned an “undocumented alien” need only be present in the United States for 183 days over a three-year period, including 31 days in the current year:

“Nonresident aliens meet the substantial presence test if they have spent more than 183 days in the United States,” says the IRS document. “To meet the substantial presence test and thus be considered a resident alien for tax purposes, an alien must at least:

“1. be physically present for 31 days in the current year, and 2. be physically present for 183 days (as calculated below) during the 3-year period consisting of the current year and the 2 immediately prior years. The 183 days are calculated as follows: a. all days of presence in the current year; b. 1/3 of days of presence in the year immediately before the current year; and c. 1/6 of days of presence in the year before that.”

Illegal immigrants have found the ITIN as a way to legally establish credit and own assets in this country. For illegal immigrants from Mexico, the first step is to obtain a Matricula Consular, an identification card issued by the Mexican government to nationals living outside the country.

The Matricula is obtained at any Mexican consulate or mobile “satellite station,” many of which visit Hispanic communities and local bank branches to offer expedited services. Matriculas are taken by numerous American banks as an acceptable form of I.D. with which to open bank accounts and lines of credit.

In August 2004, the GAO presented a report to Congress entitled, “Consular Identification Cards Accepted within United States, but Consistent Federal Guidance Needed.” The report said there were already well over 100 financial institutions accepting the cards.

“The Mexican embassy has reported that 160 financial institutions nationwide now accept the Mexican CID card as proof of identity for opening bank accounts,” the GAO said.

The GAO indicated that the Patriot Act was not seen as an impediment to banks accepting consular identification cards (CID) as identification for foreign nationals.

“Department of the Treasury adopted a regulation in 2003 pursuant to the USA PATRIOT Act (P.L. 107-56) that, in effect, allows banks to decide whether or not to accept CID cards as identification for the purposes of opening an account or making other transactions,” the GAO report said. “On the other hand, a senior Federal Bureau of Investigation (FBI) official, within the Department of Justice, has stated that the Mexican CID card is not a reliable form of identification and that its acceptance could support false identities, while a senior DHS (Department of Homeland Security) official has also expressed security concerns.”

Most banks that accept the Matricula and ITIN to establish bank accounts state that an account holder must be in “good standing” with the bank for at least three months before extending to that person credit offers.

The credit cards and loans on offer under the ITIN have generally commanded high interest rates and an initial fee. Still, there is a demand for these products as it offers the applicant a chance to build credit without the use of a Social Security number.

Though ITINs are not intended for anything other than tax-filing purposes, they can in fact be used to establish a credit history in the United States.

Steve Katz, director of communications for TransUnion, one of the country’s three major credit-reporting bureaus, said: “TransUnion does accept ITINs to establish a credit rating” but stores a person’s ITIN-based credit history in its own separate database.

“If a person receives a Social Security number (at some point) in the future, we add it to their credit file (along with their ITIN-based credit history).” Katz said.

Rod Griffin, director of education for Experian, another of the three major credit-reporting bureaus, told that the credit-rating organizations “will use everything (documentation) provided to us in order to establish credit,” including “date of birth, personal banking records, past payment history, and the Individual Taxpayer Identification Number.”

“If a person opens a bank account with an ITIN, and the bank reports the account details to a credit union, (the ITIN holder) is building credit,” he said.

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