Including immigrants in the U.S. tax system is fiscally responsible and can boost economic growth by lifting the well-being of their families
The recently enacted Inflation Reduction Act boasts the potential for more noncitizen immigrant workers and entrepreneurs to pay into the U.S. tax system, improving the federal government’s tax collection. What’s more, the way the IRS can go about bringing these workers and entrepreneurs into the U.S. tax system would facilitate the better delivery of targeted, anti-poverty benefits to already-eligible households to boost U.S. economic growth and productivity.
But there’s a catch. Some of the $80 billion in new funding for the IRS in the new law, which is expected to improve tax collection by auditing high-income earners, needs to be deployed toward enabling noncitizen workers and entrepreneurs to fulfill their lawful taxpayer obligations. Specifically, the U.S. Congress’ allocations can serve immigrants if the IRS prioritizes the administration of Individual Tax Identification Numbers, or ITINs—a nine-digit number that allows certain noncitizens to comply with their taxpaying obligations.
These ITINs not only allow entrepreneurs and workers to contribute billions of dollars to public coffers but also will facilitate targeted tax credits to economically vulnerable households and children, thus advancing more immigrant-inclusive policies through U.S. tax system, including for the citizen children of immigrants. But this will require the IRS to use some of its expanded funding from the Inflation Reduction Act to help noncitizen workers and entrepreneurs file their lawful federal taxes.
In short, by decreasing the barriers to the use of ITINs in tax filings, the IRS can advance economic prosperity for and by immigrants and in the U.S. economy more broadly.
In this column, I briefly examine how the budget reconciliation process that led to the enactment of the Inflation Reduction Act initially included proposed new pathways to lawful permanent residency and citizenship for undocumented immigrant workers that were ultimately considered inappropriate to be included in the budget reconciliation process. I then explore in detail the recent history of ITINs and noncitizen immigrant taxpayers to show how some of the $80 billion in new funding for the IRS can boost federal tax revenue substantially. I then examine how ITINs can improve long-term U.S. economic growth and productivity by channeling key tax credits, particularly to families with citizen children—boosting the human capital of the nation’s future generations of workers.
For this to happen, the IRS should provide new funding to make ITINs more accessible to noncitizen immigrants.
The Inflation Reduction Act’s initial immigration proposals
During the congressional debate over provisions to be included in the Inflation Reduction Act, immigration advocates tried and failed to use the reconciliation process to improve access to immigrant visas, green cards, and permanent residency, as well as provide temporary protection from deportation for long-time residents with work authorizations. These provisions could have contributed to strong, stable, and broadly shared economic growth by bringing more noncitizen immigrant workers and entrepreneurs into the federal tax system in the United States.
These provisions ultimately didn’t pass because they were deemed inappropriate for the budget reconciliation process, which typically only includes provisions that will affect the federal government’s bottom line. Yet the Inflation Reduction Act still offers an exciting opportunity for the IRS to use its resources to efficiently provide immigrants with ITINs.
But first, a brief primer on the history of ITINs.
The history of ITINs and immigrants
U.S. citizens accustomed to filing their own taxes with Social Security Numbers may be unaware of their noncitizen peers’ taxpaying experiences. Federal income tax obligations stem from residency, based on one’s length of stay, regardless of immigration status. As such, the IRS created the ITIN in 1996 so that noncitizens who may be ineligible for Social Security Numbers can comply with their tax obligations.
According to IRS estimates, millions of returns are filed by primary taxpayers with ITINs, reflecting billions of dollars of revenue added to federal coffers, even after accounting for the tax credits that many immigrant families use to reduce their federal tax liabilities. Unlike Social Security Numbers, ITINs may expire due to nonuse—if a migrant leaves the United States for a number of years, during which they have nonresident status and no legal obligation to file, they must apply for a new ITIN. In recent years, the IRS has received millions of applications for new ITINs.
The delays and difficulties faced by ITIN applicants have, for decades, attracted the scrutiny of the U.S. Department of the Treasury’s Office of the Taxpayer Advocate, located within the IRS and led by the National Taxpayer Advocate. In 2003, for example, the National Taxpayer Advocate’s annual report to Congress highlighted the increasing demand for ITINs among immigrants in the United States, including for the purposes of demonstrating good moral character. Indeed, tax compliance, which may require an ITIN for those without Social Security Numbers, helps immigrants seeking pathways to lawful permanent residency and U.S. citizenship.
Yet despite attempts by migrants to comply with tax laws, securing and using ITINs raises challenges on many fronts. These include requiring ITIN applicants to file tax returns along with the ITIN application, as well as the IRS lacking sufficient staff to expeditiously process these ITIN applications and tax returns. Accordingly, the National Taxpayer Advocate wrote in its 2003 report that the “difficulty in obtaining assistance and the processing delays involved in receiving ITINs place a significant burden on individuals who are attempting to participate in the tax system and comply with the law.”
Two decades later, the onslaught of COVID-19 pandemic further exacerbated the problems for immigrants seeking ITINs, with the National Taxpayer Advocate raising alarms anew and recommending reforms. These paper-processing delays already affected a broad universe of paper filers, but new ITIN applicants found pandemic-induced delays uniquely unavoidable. That’s because noncitizens are unable to e-file when seeking an ITIN number assignment and instead must attach their ITIN application to a paper tax return. Accordingly, the National Taxpayer Advocate encouraged the IRS to be more accommodating of ITIN applicants.
Better access to ITINs facilitates easier voluntary tax compliance, contributing to the billions of dollars of ITIN-filer tax collections. More specifically, the revenue benefits come not only from noncitizen taxpayers employed by U.S. firms but also from noncitizens who may be employers themselves. Despite prohibitions on employing undocumented immigrants, undocumented employers can and do hire documented workers. The use of ITINs can boost fiscal contributions from undocumented immigrant entrepreneurs and their workers.
The U.S. Congress in 1996 also barred ITIN-holding immigrants from receiving certain public benefits by requiring Social Security Numbers to access those benefits. More recently, because of Congress’ definition of a “valid identification number,” the initial rounds of direct pandemic relief payments in 2020 from the IRS penalized even Social Security Number-carrying people because they either were married to noncitizens or were the children of noncitizen parents—even when those same adults had ITINs and perfect tax compliance. Aggrieved U.S. citizens filed lawsuits claiming that their ineligibility for the IRS payments based on their personal relationships violated their constitutional rights, and in subsequent rounds of relief, Congress narrowed some, but not all, exclusions.
This brings us to the taxpayer benefits and refundable tax credits facilitated by ITINs, including the refundable federal Child Tax Credit, as well as potential state benefits. The U.S. Congress has long allowed ITIN-holding noncitizen parents to claim the Child Tax Credit for children who are U.S. citizens. And even as ITIN-holders are excluded from the federal Earned Income Tax Credit, many states may allow ITIN holders to claim parallel state-level Earned Income Tax Credits, including in my home state of California.
As such, an ITIN is not only in itself a taxpayer service, but also a conduit for other social infrastructure services and benefits. By facilitating targeted tax credits back to vulnerable households and children, ITINs expand the reach of these economic relief programs, thereby advancing the goals of federal and state legislators to create more equitable and stronger economic growth in the future.
How the Inflation Reduction Act can broaden access to ITINs
While the more-explicit immigration provisions in the Inflation Reduction Act may have failed, prioritizing immigrant access to ITINs is something for which the IRS has both the power and financial resources. The IRS, for example, could work toward allowing for the electronic processing of ITIN applications, even without a completed tax return. And a group of organizations working with immigrant taxpayers recently recommended that the IRS improve its Certified Acceptance Agents network, which provides in-person verification of identity documents.
Beyond expanding the number of CAAs, the IRS should also consider how to locate them in places that are accessible for immigrant taxpayers. (To that end, the IRS currently has a moratorium on new CAA applications until 2023 as it pursues modernization and efficiency updates.) If the electronic processing of ITINs is enabled, it will allow immigrants’ economic contributions to enrich the public fisc because of currently uncollected tax revenue flowing into the IRS and improve the lives of the vulnerable households and children that inspired legislators to design various anti-poverty tax credits in the first place.
In sum, the IRS’s new funding can strengthen ITIN administration. The IRS can and should use its resources to efficiently provide immigrants with ITINs, which would provide greater federal tax revenue and facilitate targeted, anti-poverty benefits to already-eligible households. In expanding ITIN access, the IRS would support U.S. economic growth and productivity now and in the future, including for the U.S. citizen children of noncitizen immigrant taxpayers who would benefit today from greater investments in their future human capital.