Here's some great news about illegal aliens from a totally unexpected source — Obamacare.
Illegal aliens wanting income tax refunds, and there are a lot of them, face a tough choice this income tax filing season:
- They can admit, in writing, that they and their family members are illegal aliens in order to seek to collect income tax refunds; OR
- They can be silent about it, in a couple of different ways, and forego (collectively) billions of dollars worth of these refunds, some legit, and some not.
And who created this delicious dilemma? Why, the Obama administration itself, though I suspect that very few, if any, of its executives know that this is the case.
Those confessing illegal status will do so in some detail, providing complete information on their names, the names of their family members (and their legal statuses), their home addresses, their home phone numbers, and of course, their incomes.
Those not confessing, and thus not seeking refunds, will add perhaps billions to this year's net income tax receipts. That, of course, is excellent news for the rest of the taxpayers.
On the other hand, this situation will also probably, and unwittingly, encourage some illegal aliens to lie on their income tax returns, but in many cases to lie in a brand-new way.
All the above speculation is based solidly on information currently available on the admittedly endless IRS website. No one inside IRS whispered it to me. I have seen nothing in writing on the matter.
The situation probably developed as IRS went ahead and (honestly and rigorously I must say) designed this year's income tax forms to meet the challenges of Obamacare without apparently touching base with either the White House or the Department of Homeland Security. There will be some angry, high-level phone calls when this gets noticed.
Take a deep breath; the explanation for why this happened is complicated.
Obamacare or the Affordable Care Act (ACA). The key element here is the individual mandate: People who are eligible for ACA are supposed to have health insurance; if they do not, and are not exempt (a concept I will return to), they are subject to a fine or a tax and this is largely to be collected through the income tax system, with the tax refunds being the source, I suspect, of most of the fines. (As a citizen I have no objections to the fines; we need medical insurance to have as broad a base as possible.)
As best I can decipher it, aliens fall into five groups under the ACA and tax laws:
- Illegal aliens are not allowed within the ACA, and are thus exempt from the fines.
- Most non-immigrants (e.g., foreign students and guest workers) need not participate in the program, and are thus automatically exempt.
- Some non-immigrants may opt in to the program if they choose, but are exempt if they do not want to participate.
- Long-term (five years-plus) legal nonimmigrants seem to be in a never-never land of IRS, if not ACA, neglect. As I read the ACA, they may opt in to the program. As I read the sketchy IRS instructions, the agency has forgotten about them and does not specify whether they are exempt or not. There are probably a million or more aliens in this category, including some F-1 students and many H-1Bs. Some, of course, are covered by ongoing medical insurance and whether or not they may be exempt is a moot question. (IRS may clarify this later.) Let's call this group the LTNs, for long-term non-immigrants.
- Lawful permanent residents (a.k.a. those with green cards), as well as citizens, must participate in the ACA with some stated exceptions that do not always relate to alien status.
Income Tax Refunds. Most American taxpayers pay more in withholdings than they owe in federal income taxes. To get refunds, they must file the IRS Form 1040. A few million aliens, largely in short-term legal status, file a different form, the 1040NR, with the initials standing for Non-Resident, for the same purpose.
Illegal aliens should use the 1040 if they have been here for five years, or more or the 1040NR if they have been here a shorter time. I suspect most illegals, no matter how much seniority they have, use the 1040 whether they should or not; it is better known and more generous in its terms than the 1040NR.
In order to get a refund (or to simply file an acceptable return), 1040 filers will need to answer a question about ACA. This can be seen on line 61 of the 1040 and many will need to use a new, secondary form, 8965.
1040NR filers, I suspect, will not need to answer a question on this subject because they are assumed to be exempt. While IRS has a draft 1040 for 2014 on the Internet as usual, there is (as is the pattern) no draft 1040NR for 2014 on the website yet.
The Challenge of Seeking an ACA Exemption on the 1040. When three giant and internally complex governmental systems (ACA, tax collection, and immigration) come together on a single issue (tax refunds involving the individual ACA mandate) for the first time, there are bound to be problems, and that's what we find here. Let's walk through the process by which an ACA exemption, for alienage, is reported.
Step 1: The 1040. Line 61 reads "Health Care: individual responsibility (see instructions) Full-year coverage"
Those with acceptable medical insurance for the full year simply check the box; those with partial coverage or seeking an exemption must use form 8965; so, all aliens seeking an exemption must use the form, and filing the 1040 without the 8965 or without checking the box on line 61 leads to no refund at all. An X in the box presumably gives IRS the opportunity to check with ACA records to see if the filer is telling the truth.
Step 2: The 8965. Aliens seeking an ACA exemption for one or more members of the family need to complete Part III of the form. This part of the form identifies the individual family members, their SSNs, the exemption type claimed, and the number of months (or the full year) for each exemption.
Step 3: The Exemption Code. In order to determine the exemption type, the alien will have to turn to a list on page 2 of the 8965 instructions. The only category that appears to be helpful is code C:
Citizens living abroad and certain noncitizens — You are:
- A U.S. citizen or resident who spent at least 330 days outside the U.S. during a 12-month period,
- A U.S. citizen who is a bona fide resident of a foreign country or U.S. territory, or
- Neither a U.S. citizen or U.S. national nor an alien lawfully present in the U.S.
Code C relates only to those answering "yes" to this question. One could assume that the vast majority of those with U.S. addresses entering this code are illegal aliens.
Later, on page 9 in these instructions, there is an additional group covered by this category, U.S. nationals, a tiny category consisting of people born in American Samoa and a few from the Commonwealth of the Northern Mariana Islands: "you file a Form 1040-NR or Form 1040NR-EZ. Do not attach Form 8965 to your tax return." (Presumably one is not to attach that form because one is automatically exempt.)
In the course of working with these data I have noticed a couple of potential loopholes that would (licitly in some cases) help some illegals around this dilemma; I will be happy to describe them to IRS professionals, but see no point in publishing them here.
Comments. There are several:
- I am not an income tax professional, but have extensive experience with the program as a result of filing my own 1040s for 50 years and because I have been running, as a volunteer, an income tax counseling service for grad students (many of whom are aliens) at a major DC-area university for the last dozen years. It took me several hours to find out what is described above, and these provisions will be even more baffling for an alien.
- Given that there are no more than three to six million citizens living abroad, and something like 12 million illegals here, why bury the larger category under the smaller one in the instructions? Why not create two more or less equal categories of those overseas and those illegally here? Why not include the text about the 1040NR filers in the list? I have a sense that the 1040 is generally a pretty well designed document, but that IRS did not handle the ACA-exemption issue very well this year.
- The usually sleeping grammarian in me wonders why not: "neither a U.S. citizen nor a U.S. national nor an alien lawfully present in the U.S." instead of the current text?
- The whole complex question of tax credits for one's ACA coverage premiums, if one has them, as opposed to the penalties for not having such coverage is yet another subject and one that I have not touched upon here.
What Happens Next? First, open-borders types are likely to howl to high heaven when they find that illegals will need to confess, in writing, their illicit presence in order to obtain income tax refunds. They will, in doing so, ignore two key bits of reality: 1.) IRS will probably not pass along the information to ICE; and 2) ICE would probably do little or nothing with the information if they did get it. I am a neutral observer on this one, but would note that the questions could have been drafted in such a way as to not stir up this protest, though I am delighted that they were not.
Second, the introduction of the ACA exemption variable — and the related question about one's civil status — will probably reduce the number of illegal aliens seeking refunds, thus saving the Treasury several billion dollars. Perhaps either Obamacare itself, or this year's tax forms, were designed poorly with this goal in mind, but I doubt it.
It will be interesting to see how these matters play out during tax season.