A new report by the Treasury Department’s Inspector General for Tax Administration found that millions of people may have improperly received Individual Taxpayer Identification Numbers from the IRS that could be used to fraudulently claim tax refunds.

J. Russell George

TIGTA reviewed a sample of ITIN applications and found that almost 70 percent contained significant errors or raised concerns that should have prevented the issuance of an ITIN. The IRS estimates that it has issued more than 14 million ITINs as of December 2008.

“The number of individual income tax returns filed using ITINs and reporting wage income has increased by 247 percent from 2001 to 2008,” said TIGTA Inspector General J. Russell George in a statement. “If the IRS continues to issue ITINs without proper verification, the risk of fraudulently filed returns – along with fraudulently claimed refunds – will continue to rise.”

ITINs are intended to provide tax identification numbers to resident and nonresident alien individuals who may have U.S. tax reporting or filing obligations but do not qualify for Social Security Numbers, which generally are only issued to U.S. citizens and individuals legally admitted to the U.S. The issuance of an ITIN, however, does not change an individual’s immigration status, nor does it entitle the individual to work in the U.S. or receive Social Security benefits.

In March 2009, TIGTA reported that ITIN filers are receiving billions of dollars in Additional Child Tax Credits intended for working families even though such individuals are not authorized to work in the U.S. In its new report, TIGTA also found that the IRS has not implemented controls to prevent ITINs from being used by more than one taxpayer on multiple tax returns.

For example, more than 55,000 ITINs were used multiple times on tax returns for 2007 with refunds totaling more than $202 million. Furthermore, IRS employees are required to process ITIN applications even when the applicant appears to be using another individual’s Social Security Number for work (i.e., the ITIN application includes a tax return and Form W-2 issued with another person’s Social Security Number).

TIGTA made several recommendations in its report, including that the IRS should revise its guidelines related to processing applications for ITINs and properly validate the information provided on ITIN applications. While IRS management agreed with most of TIGTA’s recommendations, the IRS disagreed with the recommendation to develop controls to prevent ITINs from being used on multiple returns, stating that such returns are subject to audit after the return is processed. However, TIGTA strongly believes such controls should be implemented during processing, before tax refunds are issued, since only a small number of ITIN returns are subject to audit.