The US tax system is based on individuals assessing themselves the taxes they owe and forwarding the monies owed to the IRS. Many immigrants with low US earnings do not file income taxes, while others file returns to take advantage of the Earned Income Tax Credit, a refundable tax credit available since 1975 to low-income, working taxpayers.
The EITC matches each dollar earned with a refundable tax credit of between 7.65 cents and 40 cents, depending on family size, until an income ceiling is reached. For a family with two or more children, the refundable credit reaches a maximum level of $3,370 when a worker earns $8,425, remains at that level through earnings of $11,000, and then gradually declines to zero when earnings reach $27,000. The size of the credit varies according to family size, since the poverty level varies with family size.
The cost of the EITC has risen significantly, from $7 billion in 1990 to $25 billion in 1996.
Until the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 was approved in August 1996, unauthorized aliens were eligible for the EITC benefits. Beginning in 1997, those filing tax returns without valid Social Security numbers are ineligible for EITC benefits. In 1994, the two million Hispanic households that claimed the EITC were 26 percent of all households claiming the EITC.
The EITC is designed to bring the income of a family of four with a full-time, year-round worker at least up to the poverty line, taking into account the value of the family's food stamps and the burden of its payroll taxes. Over 80 percent of the families eligible to claim the credit do so. By comparison, only about 60 percent of those eligible for Food Stamps receive them.
The IRS in April 1997 released a study of the EITC for 1994 for returns filed in April 1995, which concluded that there is a very high error rate in EITC returns, including a high error rate in the 50 percent of such returns filed by tax preparers. According to the IRS, there were $4 billion in excess EITC payments in 1994. About half of those claiming the EITC uses a tax preparer and some of these preparers are believed to fraudulently inflate the number of dependents to obtain a larger refund.
If a taxpayer obtains EITC benefits fraudulently, she can be barred from the EITC for two to 10 years.
ITINs. Virtually all persons with US earnings are required to file US income tax returns, but only legal immigrants authorized to work in the US may obtain Social Security numbers. In June 1996, the IRS began to issue Individual Taxpayer Identification Numbers (ITINs) to unauthorized and other aliens unable to obtain Social Security numbers. Foreigners seeking ITINs file a W-7 form with the IRS that includes the date and place of birth and family information.
The Wall Street Journal on August 21, 1997 examined how the tax credits included in the welfare reform law of 1996 were working at Aramark, a 100,000-employee organization that hires minimum-wage workers in cafeterias and other food-service operations across the U.S. According to Aramark, the major problem with the tax credit incentive is that it is very hard to keep eligible employees for the 400 hours required to get the tax credit.
The story profiled a 225-employee Aramark operation at Emory University in Atlanta that hired 46 new employees who should have made Aramark eligible for a tax credit of 35 percent of the newly hired workers' pay up to $2,100, but Aramark got the credit only if the new employee remained on the job for 400 hours; 11 left or were fired before that time. Another 14 workers did not provide Aramark with the welfare information needed to file for the credit; employer requests must be filed within 21 days of hiring a new worker.
Of the remaining 21 newly hired workers, eight had been on welfare, and all left before they reached 400 hours with Aramark. Three of the other 13 who qualified because, for example, they were disabled or ex-felons, earned Aramark the tax credit and only one was still working for Aramark in August 1997.
Overall, only 237 of the 859 potentially eligible employees hired by Aramark across the US qualified for the tax credit, and Aramark expects a $350,000 tax credit for hiring them. The tax credit program was modified so that, beginning October 1, 1997, employers can get up to $1,500 in credits for eligible employees who work at least 120 hours and $2,400 for those who work more than 400 hours; if the new employee was on public assistance for at least 18 months, the credit rises to $3,500 for those who stay on the job 400 hours.
Household Help. The IRS estimates that as many as four million people owe taxes on wages paid to household help-- but far fewer tax returns include Schedule H statements of such wages --500,000 in 1994, 300,000 in 1995, and 314,000 in 1996. The drop comes despite changes made by Congress to make it simpler to report and pay Social Security and Medicare taxes after Zoe Baird's nomination to become attorney general in 1993 was withdrawn over her failure to pay taxes on the wages of her household help.
Social Security taxes are owed on payments of $1,100 or more a year to household help: IRS Publication 926, Household Employer's Tax Guide (800 829-3676; http://www.irs.ustreas.gov) In addition, employers are expected to verify their newly hired employees legal right to work in the US by completing an I-9 form (800 870-3676) and report the names and Social Security numbers of newly hired workers to state agencies, to ease enforcement of court-ordered child support. Software, NannyPay http://www.essentia-soft.com) goes through the process step-by-step.
Many taxpayers consider their gardeners and other household help independent contractors responsible for their own taxes.
David Cay Johnston, "Taxes on Nannies Go Unpaid Despite New Law," New York Times, April 5, 1998. Rochelle Sharpe, "A tax credit designed to spur hiring seems promising-at first," Wall Street Journal, August 21, 1997.