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March, 2006

New IRS Rule Targets Employers Who Hire Illegal Workers
By Joe Cobb


Hundreds of thousands of workers illegally cross the borders of the United States every year to look for work. American employers eagerly hire these workers because they are willing to take jobs at low pay and they work hard. But those employers do ask their workers to furnish a social security number to comply with tax laws. The workers often just make up a false number and give it to their payroll office.

Employers in California, and other states, need to worry about a new IRS enforcement procedure directed against immigrant workers. For 20 years, employers have been required to verify the legal work status of new employees. The Immigration Reform and Control Act of 1986 mandated employers to fill out an "Employment Eligibility Verification" (I-9) form and check social security cards, driver's licenses, or passports for everyone they hire. But since employers do not have to send these I-9 forms to any government agency--they only have to keep them on file for three years--most employers do not pay attention. This is about to change.

Enforcement of the I-9 rules would be a massive job. The Citizenship and Immigration Services agency doesn't have the manpower or the budget to look at millions of employers to see if they have accurate I-9 forms on file. Although the law imposes a $10,000 fine and criminal penalties on employers, the lack of enforcement has effectively made the law a dead letter.

The government is happy to get the social security taxes those employers deduct from workers' paychecks, under the false social security numbers, because the money helps cover the social security trust fund deficit. This is pure profit to the government. Since their numbers are false, the workers will never receive any credit for paying taxes when they apply to collect a social security pension. This is "free money" for the social security program.

But enforcement of the laws against illegal immigration is a hot political issue. In 1990, there was a proposal in Congress to create a national computerized database in the Immigration Service, listing everyone legally authorized to work in the United States. The plan was to make every employer check with the computerized database before hiring new workers. This proposal was killed quickly because members of Congress saw what a nightmare it could become if the computers malfunctioned. Thousands of legal American workers could be denied jobs simply because a false negative report might be sent by the computer. Even Congressmen are aware their government is not very efficient.

But a new regulation from the Internal Revenue Service is the first step toward tighter enforcement of the old rules. If the $10,000 penalties were collected from employers who have ignored this law, it would be a substantial revenue windfall for the government. After all, the IRS is all about collecting money.

IRS publication 1345A, issued in January 2006, gives new instructions for income tax preparers who file tax returns electronically. In the past several years, more and more income tax returns have been filed electronically. Electronic filing is done mostly by the major income tax companies such as H&R Block, Jackson Hewitt, and Liberty Tax Service, as well as by individuals who buy software like Tax Cut or Turbo Tax. These companies also specialize in preparing income taxes for lower-income clients, who are attracted by the refund loans that offer to pay your refund in one or two days (for a profitable fee). The "illegal workers" are mostly in this group, because they are poor and need a quick refund.

The new IRS regulations require income tax preparers to identify workers with incorrect social security numbers on their W-2 forms. When the social security number on the W-2 does not match the social security number the taxpayer puts on his or her Form 1040, the new regulations tell the income tax preparers they cannot file the tax return electronically. It has to be mailed. This regulation automatically separates these mailed tax returns from the millions of others, filed electronically, that are never examined by human auditors.

Only a few hundred thousand income tax returns will be mailed under this new regulation, but each one will be opened by a human being. The new regulation will allow the IRS to accumulate actual paper copies of most W-2s that are used by illegal workers to file their tax returns.

Every W-2 has the employer's name and address on it. Every one of the W-2s of illegal workers will go into a collection that identifies who is actually hiring illegal workers. With this collection of paper W-2s, the enforcement of the employer sanctions and the collection of the $10,000 penalty will become much, much easier and less expensive for law enforcement officers.

Watch out, employers. Your number is up next.

Joe Cobb was chief economist for the United States Senate, prior to holding the prestigious John M. Olin Senior Fellowship at the Heritage Foundation (1993-96). Cobb is a past president of the National Association of Business Economists, National Capital Chapter.