Illegal Aliens, Nonimmigrants Rip Off IRS by $6 Billion a Year

By David North on May 22, 2010

My headline, above, should have been used as the title of the Government Accountability Office's recent tax compliance report. I calculate, based on the GAO report, that those two groups are routinely depriving the U.S. Treasury of an estimated $6 billion a year in income taxes.

GAO, as usual, wrote the report in its trademark, color-me-gray prose, but, unusually, missed a gold mine of government statistics that would have shown the dramatic size of the problem.

For the record, the report, published last month, carried the title: "IRS May Be Able to Improve Compliance for Nonresident Aliens and Updating Requirements Could Reduce Their Compliance Burden," report number GAO-10-429.

The report, despite its shortcomings, has two very useful elements. First, it points out that there are two basic income tax forms, the 1040 that most of us have used for years, and the 1040NR (for nonresident) that is supposed to be used by most nonimmigrants and all illegal aliens during their first five years in the country. The 1040NR has fewer opportunities for deductions and thus it taxes the same income more heavily than the 1040. (I have had a lot of exposure to both forms in recent years, as I have provided a volunteer income tax-counseling service to graduate students at the University of Maryland, including many F-1 and J-1 students.)

The GAO document's second virtue is that it reports that 634,000 1040NRs were filed in the 2007 tax year, with a total tax liability of $2.5 billion. I pay attention to this field and had not seen either figure in the past.

While the report worries that many aliens may have filed the wrong form, it does not quantify the extent of mistaken (or non-) filing and thus understates the size of the problem.

It does so by billions of dollars a year, billions that would help close the income-outgo gap in our seriously over-stretched budget.

The data that GAO overlooks can be found in, or estimated from, the publications of the DHS Office of Immigration Statistics.

I know that I am heading into eyes-glaze-over territory, but let me repeat the 2007 IRS total of 1040NR filers – it is 634,000. That's a key number.

It should be compared with, as GAO does not, the estimated total number of aliens who should be filing the 1040NR.

The bottom line, as I outline subsequently, is that there are probably more than 5,000,000 aliens who should be filing the 1040NR. An unknown number are not filing at all, and another large number are mistakenly (or deliberately) filing the 1040 form, and collecting deductions and tax breaks to which they are not entitled.

The 5,000,000 potential filers vs. the actual 634,000 filers is the elephant-in-the-room that the GAO did not discuss in its report. GAO also did not mention illegal immigration in the entire report, which is also odd. (I used the find mechanism on the computer to check the whole document for the words "illegal," "unauthorized," and "undocumented" and it found none, though it found plenty of references to "alien" and "aliens.")

Let's look at some more numbers: 5,000,000 - 634,000 = 4,366,000 should-be filers. Let's round that down to 4 million (being simultaneously conservative and lazy), and assume that half filed 1040s, and half filed nothing.

Let's also assume that the combined group of nonimmigrants and illegals that did file 1040s (and not 1040NRs) saved about $1,000 each by doing so. (That is about the difference in taxes, between 1040 and 1040NR, on incomes of about $25,000). Let's further assume that the people who did not file at all, probably a less prosperous group than the 1040 filers, saved $2000 each. This second group paid no federal taxes at all. (I should point out that these are very conservative estimates of the tax liability of these two groups.)

The two million who filed the 1040 mistakenly, thus robbed the Treasury of $2 billion a year, and the non-filers deprived the Treasury of about $4 billion, or a total estimated shortfall of $6 billion a year. I think the GAO had an obligation to its readers (and its bosses in Congress) to have made an estimate along these lines.

The rough estimate of five million should-be 1040NR filers is based on two sets of numbers reported by the Office of Immigration Statistics, one set covering illegal aliens and the other working nonimmigrants.

According to the Office's "Estimate of the Unauthorized Immigrant Population Residing in the United States: January 2009" there were 11.6 million such persons in January 2008. Using the Tables 1 and 5 of that report, which deal with their length of stay and their ages, I calculate that there were 1.3 million men 18-54 in the group here for less than five years, and just under a million women in the same situation. Let's assume that 90 percent of these men and 50 percent of these women are both in the work force and making at least $3,650 a year, the amount requiring (all else being equal) the filing of a 1040NR. That's a group of 1,520,000, which, to be conservative, we will round down to 1.4 million.

The other 3.6 million is my estimate of legal nonimmigrants here for less than five years and working on a variety of visas that permit employment. This is based on the admission figures for the principals in these classes (thus excluding dependents), and including only some of the F-1 foreign students. There are about 1.8 million admissions of these working nonimmigrants every year.

An admission is a government-recognized entrance to the country; it is not a count of people. One nonimmigrant could go through a port of entry once in a decade, and another could do so several times a year. The Office of Immigration Statistics includes these admissions data in the 2008 "Yearbook of Immigration Statistics."

My heroic assumption is that if you double the number of admissions you get the working nonimmigrant population here for less than five years; to the best of my knowledge no one has worked out a formula to convert admissions data to population data. Thus, the 1.8 million admissions number leads to the 3.6 million population estimate.

Whether my population estimates are off by 50 percent in either direction or right on the mark, it is clear that there are millions of nonimmigrants who should be filing 1040NRs and who are not, and that is costing to the U.S. government billions of dollars each year.

The GAO report not only missed the drama of the missing billions, it did not even consider a good way to correct most of the problem. The Department of Homeland Security has the names, arrival dates, A-numbers, and probably some Social Security numbers on millions of nonimmigrants. It could send that information, as corporations send dividend payment data, to the Internal Revenue Service and then IRS would not only know that there are these millions of nonimmigrant workers in the country, it would know which ones should file a 1040 and which ones a 1040NR.

Unfortunately, no one has a similar, comprehensive centralized data set for the illegal aliens working in the country.

Fortunately, however, CIS has at the printer a Backgrounder dealing with the broader subject of raising billions more in revenue for the federal government from the migration process. Though the document was written before we learned of the low number of 1040NRs filed, it deals with a variety of innovative techniques the government could use to close existing fiscal loopholes related to international immigration.

The document is called "Charging More for Immigration." Watch for it.