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Immigration Bill’s “Back Taxes” Amendment Much Harder to Implement than Senator Hatch Suggests
As our new report explains, some senators are proposing amendments to the immigration bill that would make its long and difficult path to citizenship far more difficult — in some cases undermining the fundamental goal of enabling undocumented workers to legalize their status. One such proposal, from Senators Orrin Hatch (R-UT) and Marco Rubio (R-FL), would require immigrants seeking legal status to prove they have paid all of their taxes since they entered the country before adjusting to a legal status. On the Senate floor Wednesday, Senator Hatch claimed that the IRS is well-positioned to determine such individuals’ tax liability, even when workers lack earnings and tax records:
The IRS is well experienced at estimating the tax liabilities for people who, for whatever reason, lack the records that normally support a tax return. . . . Using bank records, credit card statements, housing records, and other evidence of an individual’s lifestyle, the IRS is able to construct returns and estimate tax liabilities for nonfilers who are U.S. citizens and resident aliens. The same process can be used for immigrants looking to certify they no longer owe any Federal taxes. That is not a tough thing to do…
But the IRS does not routinely try to use such records to guesstimate people’s incomes. These are extreme methods, which it resorts to in only a very small number of cases each year. Senator Hatch is essentially arguing that it would be workable — and a good use of taxpayer money — to require the IRS to conduct extensive field audits of very large numbers of undocumented immigrants seeking legal status. The audits would be very complicated in many cases; many of these workers’ past employers will be difficult to locate, will not have records for cash transactions made years ago, and (for obvious reasons) may be reluctant to cooperate. Moreover, many of these immigrants likely will not have bank records or credit cards, will have moved many times, and will have been working in the United States for many years or even decades, so reconstructing their records for this entire period could prove extremely difficult. The IRS’s experience in estimating a family’s income based on its “lifestyle” is largely restricted to a very small number of generally high-income people and small businesses where there is a large disconnect between their reported income and the person’s lifestyle or the business’s spending and the IRS has reason to believe large-scale tax evasion may have occurred. The IRS has never used this method for large numbers of low-income workers. Given that an estimated 11 million people are eligible to legalize under the bill, the increased workload for the IRS would be tremendous. Of the 187 million individual and business tax returns filed in 2011, the IRS examined just 1.7 million — fewer than 1 percent. Moreover, over 70 percent of these audits were conducted by mail (where information is requested and provided by mail) and were not the complex, intensive audits that Senator Hatch envisions. Based on the total cost of current IRS enforcement efforts and the number of returns examined each year, each field examination would clearly cost thousands of dollars. This means that the cost of conducting vast numbers of complicated audits, as Senator Hatch evidently envisions, would run into the billions. Senator Hatch has not proposed any new funding for the IRS to conduct such audits or indicated that large numbers of new IRS staff would be hired. If the IRS tried to implement his proposal, it would have to divert a very large portion of its total enforcement resources, probably for a number of years, from enforcement activities that yield a much higher return for the Treasury to auditing millions of legalizing workers, most of whom have modest incomes. In 2012, the IRS conducted 31,700 field audits of corporations, leading to a total of $20 billion in recommended additional tax assessments — an average of more than $600,000 per review. When both individual and business field audits are considered, the average tax assessment is close to $60,000. Diverting IRS resources away from these high-return audits to try to reconstruct earnings records from modest-earning immigrants almost surely would result in a net loss of revenues to the Treasury, not the gain that Senator Hatch suggests. More realistically, the IRS would never be able to conduct the required audits, so the process of legalizing undocumented workers would grind to a halt for many — leaving the basic goal of the legislation in tatters. Undocumented workers would remain undocumented and the Treasury would collect less in taxes going forward than if these workers were allowed to come out of the shadows.