PRESENT LAW AND BACKGROUND RELATING TO 

TAX ISSUES ASSOCIATED WITH IMMIGRATION REFORM 

Scheduled for a Public Hearing 

Before the 

HOUSE COMMITTEE ON WAYS AND MEANS 

on July 26, 2006 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

July 25, 2006 

JCX-32-06 
i 

CONTENTS 

Page

INTRODUCTION ...................................................................................................................... 1 

I. PRESENT LAW ................................................................................................................. 2 

A. Income Tax Filing Requirements for U.S. Citizens, Residents, and Nonresidents ...... 2 

B. Employment Taxes ....................................................................................................... 6 

C. Confidentiality and Disclosure of Returns and Return Information............................. 9 

II. DESCRIPTION OF THE TAX PROVISIONS IN THE COMPREHENSIVE 

IMMIGRATION REFORM ACT OF 2006 ..................................................................... 14 

A. Tax Liability of Alien Employees............................................................................... 14 

B. Employer Absolution from Civil and Criminal Tax Liabilities.................................. 15 

C. Section 6103 Provisions.............................................................................................. 16 

III. ISSUES RELATED TO THE TAX PROVISIONS IN THE COMPREHENSIVE 

IMMIGRATION REFORM ACT OF 2006 ..................................................................... 18 

A. Federal Tax Liability of Aliens................................................................................... 18 

B. Employer Protection from Employment Taxes .......................................................... 20 

C. Section 6103 Issues..................................................................................................... 21 

D. Indirect Effects on Revenues Resulting from Immigration Reform........................... 23 
1 

INTRODUCTION 

The House Committee on Ways and Means has scheduled a public hearing for July 26, 

2006, on the tax impact of current and proposed border security and immigration policies. This 

document,1

 prepared by the staff of the Joint Committee on Taxation, presents a description of 

the tax provisions contained in S. 2611, the “Comprehensive Immigration Reform Act of 2006” 

as passed by the Senate on May 25, 2006, as well as the present law and select issues associated 

with those provisions. The Senate bill has four tax provisions: (1) provisions relating to 

payment of income tax by aliens, (2) limitations on refunds and refundable credits for aliens for 

taxable years prior to 2006, (3) an employer protection provision that absolves an employer of 

civil and criminal tax liability arising out of the employment of an alien applying for an 

adjustment of status, and (4) amendments to section 6103 of the Internal Revenue Code (the 

“Code”) to permit the disclosure of return information to the Department of Homeland Security 

relating to the electronic employee verification system created by the bill and mismatched social 

security numbers contained in Forms W-2 filed by employers. The bill also has indirect effects 

on tax compliance and Federal tax revenues. 

The tax provisions of the Senate bill raise many issues, including the ability to administer 

the payment of income tax provisions and refund limitations by the Internal Revenue Service, the 

necessity of absolving noncompliant employers of employment taxes, and whether the potential 

benefits to Department of Homeland Security workplace enforcement outweigh the adverse 

effects on taxpayer compliance and privacy that would result from the disclosures of return 

information. 

 1

 This document may be cited as follows: Joint Committee on Taxation, Present Law and 

Background Relating to Tax Issues Associated with Immigration Reform (JCX-32-06), July 25, 2006. 
2 

I. PRESENT LAW 

A. Income Tax Filing Requirements for U.S. Citizens, 

Residents, and Nonresidents 

In general

The Code requires an individual to file a U.S. income tax return if the individual has 

gross income subject to U.S. tax that equals or exceeds certain amounts (generally, the sum of 

the standard deduction and the personal exemptions).2

 Any person required to submit a return, 

statement, or other document is required to include a valid taxpayer identification number 

(“TIN”) on such return, statement, or other document for purposes of securing proper 

identification of such person.3

 For taxpayers eligible to obtain a Social Security Number 

(“SSN”) assigned by the Social Security Administration, the SSN is to be used as an individual’s 

TIN for tax purposes. The Internal Revenue Service (“IRS”) also assigns individual taxpayer 

identification numbers (“ITIN”) to an alien individual ineligible to obtain a SSN.4

 

Taxation of resident and nonresident aliens

Alien individuals generally are divided into two classes for purposes of U.S. income tax: 

resident aliens and nonresident aliens. An alien who resides in the United States generally is 

taxed in the same manner as a U.S. citizen if the individual meets the definition of a “resident.”5 

An alien is considered a resident of the United States if the individual: (1) is a lawful permanent 

U.S. resident (the “green card test”) at any time during the relevant year; (2) is present in the 

United States for 31 or more days during the current calendar year and has been present in the 

United States for a substantial period of time − during a three-year period, 183 or more days 

weighted toward the present year (the “substantial presence test”); or (3) makes a “first-year 

election” to be treated as a resident of the United States (a numerical formula under which an 

alien may pass the substantial presence test one year earlier than under normal rules).6 

An alien who does not meet the definition of resident alien is considered to be a 

nonresident alien for U.S. tax purposes.7

 A nonresident alien is subject to U.S. tax on income 

from U.S. sources or income that is effectively connected with the conduct of a trade or business 

within the United States.8

 Generally, income is from U.S. sources if it is paid by domestic 

 2

 Sec. 6012(a). 

3

 Sec. 6109(a)(1). 

4

 Treas. Reg. sec. 301.6109-1(a). 

5

 Treas. Reg. sec. 1.1-1(b). 

6

 Sec. 7701(b)(1)(A). 

7

 Sec. 7701(b)(1)(B). 

8

 Sec. 871(b)(1). 
3 

corporations, U.S. citizens or resident aliens, or entities formed under the laws of the United 

States or a state. Income is also from U.S. sources if the property that produces the income is 

located in the United States or the services for which the income is paid were performed in the 

United States. Income taxes on U.S.-source income that is not effectively connected with the 

conduct of a trade or business within the United States is, in general, collected by withholding.9

Foreign-source income earned by a nonresident alien generally is not subject to U.S. tax.10 

Bilateral income tax treaties may modify the U.S. taxation of a nonresident alien. 

In general, the Code does not contain special rules regarding the treatment of illegal 

aliens. For Federal tax purposes, non-citizens are treated as either resident or non-resident 

aliens. For nonresident aliens, all U.S.-source wages are taxable; there is no requirement that the 

wages be derived from legal employment.11

Social Security Numbers

In general

The Social Security Act of 1935 authorized the Social Security Administration (the 

“SSA”) to establish a recordkeeping system with respect to the Social Security benefit program. 

The SSN was created in 1936 as a means to track workers’ earnings and eligibility for Social 

Security benefits. SSNs are issued by the SSA upon application by a citizen, a qualified alien 

(an alien individual legally admitted to the United States for permanent residency), by a parent 

on behalf of a qualified child, or by persons in other immigration categories that authorize U.S. 

employment. The application for a SSN is made on Form SS-5, the Application for Social 

Security Account Number (or Replacement of Lost Card). Applicants who apply for a SSN are 

required to submit documentary evidence to establish their identity, age, and citizenship or 

lawful alien status. 

The issuance of a SSN results in the creation of: (1) a record at the SSA of the applicant’s 

earnings for purposes of determining the old-age, survivors, and disability insurance and other 

benefits to which a person may be entitled, and (2) a numerical identifier unique to the applicant 

that is used by a variety of governmental and private entities. Each year, the SSA receives 

copies of Forms W-2 issued by employers to their employees. The SSA matches the name and 

SSN provided on Form W-2 against its database of all SSNs issued. When a match occurs, the 

earnings reported on each particular Form W-2 are recorded in the relevant individual’s lifetime 

earnings history contained in the SSA record. 

Types of Social Security cards

The SSA issues three types of Social Security cards depending on an individual’s citizen 

or alien status and whether or not an alien is authorized by the Department of Homeland Security 

 9

 Sec. 1441. 

10 Sec. 864(c)(4). 

11 Rev. Rul. 60-77, 1960-1 C.B. 386. 
4 

to work in the United States (a “for-work SSN” card). The first type of Social Security card 

shows the individual’s name and SSN only. The card shows that the holder can work in the 

United States without restriction. Persons eligible to receive this type of card include U.S. 

citizens or aliens who are lawfully admitted to the United States for permanent residence therein, 

or who have permission from the Department of Homeland Security to work permanently in the 

United States. 

The second type of Social Security card bears, in addition to the individual’s name and 

SSN, the legend, “NOT VALID FOR EMPLOYMENT.” This card is issued to aliens who do 

not obtain permission to work permanently in the United States from the Department of 

Homeland Security. The SSA currently issues SSNs to aliens who are not otherwise eligible for 

SSNs if a Federal or State law requires that the alien provide his or her SSN to obtain a particular 

benefit or service. Under these circumstances, the application for a SSN must be accompanied 

by documentation from the appropriate government entity explaining the need for the SSN. The 

Department of Homeland Security then verifies the documentation before the SSA is allowed to 

issue the SSN. 

The third type of Social Security card bears, in addition to the individual’s name and 

SSN, the legend “VALID FOR WORK ONLY WITH DHS AUTHORIZATION.” The SSA 

issues this type of card to individuals who have been granted a temporary visa and who have 

permission from the Department of Homeland Security to work temporarily in the United States. 

Individual taxpayer identification numbers

The IRS issues ITINs to individuals who are required to have a taxpayer identification 

number, but who do not have and are not eligible to obtain a SSN from the SSA. ITINs are 

issued regardless of immigration status because both resident and nonresident aliens may have 

tax return and payment responsibilities under the Code. Generally, individuals must have a filing 

requirement and file a valid Federal income tax return to receive an ITIN, unless they meet an 

exception. ITINs are for Federal tax reporting only and are not valid identification outside the 

tax system. Thus, an ITIN does not authorize an individual to work in the United States or 

provide eligibility for Social Security benefits. 

Use of TINs on tax returns 

Each person listed as a taxpayer on a return must have either a SSN or an ITIN. In 

addition, taxpayers are required to list on their return the SSN of every dependent claimed, 

regardless of age.12 If a return requesting a refund is filed without a SSN or ITIN for the primary 

filer and spouse, the refund will be delayed until a valid identification number is obtained. Also, 

if a dependent’s or qualifying child’s SSN or ITIN has been omitted, the dependency exemption, 

and child credit will be denied and tax liabilities will be adjusted accordingly. 

To claim the Earned Income Credit (“EIC”), an individual and his or her spouse (if filing 

a joint return) must have a qualifying SSN issued by the Social Security Administration.13 If a 

 12 Sec. 151(e). 

13 Secs. 32(c)(1)(F) and (m). 
5 

taxpayer is claiming the EIC with respect to a qualifying child, the qualifying child also is 

required to have a qualifying SSN.14 A Social Security card that bears the legend “VALID FOR 

WORK ONLY WITH DHS AUTHORIZATION” is considered a valid SSN for EIC purposes.15 

However, a Social Security card that bears the legend “NOT VALID FOR EMPLOYMENT” is 

not a valid SSN for EIC purposes. In addition, an individual who has applied for and been 

granted an ITIN is not eligible for the EIC. 

Statute of limitations

Assessment and collection

The statute of limitations within which the IRS may assess additional taxes is generally 

three years from the date a return is filed.16 If no return is filed, there is no limitation on the 

period within which tax may be assessed. The statute of limitations within which a tax may be 

collected after assessment is generally 10 years from the date of assessment. In the case of a 

false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in 

court for collection of such tax may be begun without assessment at any time.17

Claims for credit or refund

In general, a taxpayer must file a refund claim within three years of the filing of the tax 

return or within two years of the payment of the tax, whichever expires later. If no tax return is 

filed, the two-year limit applies. A refund claim that is not filed within these time periods is 

rejected as untimely. 

 14 Secs. 32(c)(3)(D) and (m). 

15 IRS Publication 596, Earned Income Credit (“EIC”). 

16 Sec. 6501. 

17 Sec. 6501(c). 
6 

B. Employment Taxes 

Employment taxes generally consist of the taxes under the Federal Insurance 

Contributions Act (“FICA”), the taxes under the Railroad Retirement Tax Act (“RRTA”), the tax 

under the Federal Unemployment Tax Act (“FUTA”), and the requirement that employers 

withhold income taxes from wages paid to employees (“income tax withholding”).18

FICA tax consists of two parts: (1) old age, survivor, and disability insurance (“OASDI”), 

which correlates to the Social Security program that provides monthly benefits after retirement, 

disability, or death; and (2) Medicare hospital insurance (“HI”).19 The OASDI tax rate is 6.2 

percent on both the employee and employer (for a total rate of 12.4 percent). The OASDI tax 

rate applies to wages up to the OASDI wage base ($94,200 for 2006). The HI tax rate is 1.45 

percent on both the employee and the employer (for a total rate of 2.9 percent). Unlike the 

OASDI tax, the HI tax is not limited to a specific amount of wages, but applies to all wages. 

RRTA taxes consist of tier 1 taxes and tier 2 taxes. Tier 1 taxes parallel the OASDI and 

HI taxes applicable to employers and employees. Tier 2 taxes consist of employer and employee 

taxes on railroad compensation up to the tier 2 wage base. For 2006, the tier 2 employer rate is 

12.6 percent, the employee rate is 4.4 percent, and the tier 2 wage base is $69,900. 

Under FUTA, employees must pay a tax of 6.2 percent of wages up to the FUTA wage 

base of $7,000. 

Employers are required to withhold income taxes from wages paid to employees. 

Withholding rates vary depending on the amount of wages paid, the length of the payroll period, 

and the number of withholding allowances claimed by the employee. Special withholding rules 

apply to certain types of payments. 

Wages paid to employees, FICA, RRTA, and income taxes withheld from employees’ 

wages, are required to be reported on employment tax returns and on Forms W-2.20

 18 Secs. 3101-3128 (FICA), 3201-3241 (RRTA), 3301-3311 (FUTA), and 3401-3404 (income 

tax withholding). 

19 A similar tax is imposed on self-employment income under the Self-Employment 

Contributions Act (“SECA”). Under the OASDI component, the rate of tax is the combined employer 

and employee rates under the OASDI portion of FICA, i.e., 12.40 percent. Under the HI component, the 

rate is the combined employer and employee rate under the HI portion of FICA, i.e., 2.90 percent. The 

amount of self-employment tax under the OASDI is subject to the same limit as under FICA, i.e., this 

component is capped at $90,000 of self-employment income (for 2005). The amount of self-employment 

income subject to HI taxes is not capped. 

20 Secs. 6011 and 6051. 
7 

Employment taxes generally apply to all remuneration paid by an employer to an 

employee. However, various exceptions apply to certain types of remuneration or certain types 

of services, including services performed by nonresident aliens pursuant to certain visas.21 For 

example, temporary agricultural workers lawfully admitted to the United States with an H-2 visa 

are not covered under Social Security and do not pay FICA taxes.22 Other examples of excluded 

work include services performed by academic students (F-1 visas), exchange visitors (J-1 visas), 

vocational or non-academic students (M-1 visas), and international cultural exchange visitors (Q1 visas).23 The work of certain individuals, such as temporary visitors for business (B-1 visas), 

involving personal servants or airline crew members and family members of foreign government 

officials (A-1 and A-2 visas) may have their work covered under Social Security if they have 

been issued an “Employment Authorization Document” by the Department of Homeland 

Security.24 

There is no exception from Federal employment taxes for services performed by an 

illegal alien. The IRS has ruled that the exception from FICA taxes for temporary agricultural 

workers does not apply to aliens who enter the country illegally.25

Penalties on employers for SSN mismatches

Each year, employers send Forms W-2 and W-3 to the SSA by February 28 (or March 31 

if filed electronically). SSA processes the forms and attempts to reconcile any mismatches. 

After processing, SSA transmits the information to the IRS. To help correct SSN mismatches, 

SSA sends letters to both employers and employees in an attempt to match names with SSNs. 

The letters are sent to employers who submit a wage report containing more than 10 Forms W-2 

that SSA cannot process.26 

Section 6041 requires employers to provide true and accurate information returns, 

including correct SSN or TIN on Forms W-2 reporting wages or salaries paid to employees. An 

employer may be subject to a penalty of $50 per Form W-2 or 1099 that omits or includes an 

 21 See, e.g., secs. 3121(b)(19), 3231(e), and 3306(c)(19). These exceptions apply only to services 

performed to carry out the purposes of the visa. 

22 Treas. Reg. sec. 31.3121(b)(1)-1(c). 

23 Treas. Reg. sec. 31.3121(b)(19)-1. 

24 See, Martin H. Gerry, Deputy Commissioner, Disability and Income Security Programs, Social 

Security Administration, Testimony Before the Subcommittee on Social Security of the House Committee 

on Ways and Means (March 2, 2006). 

25 Revenue Ruling 77-140, 1970-1 C.B. 301. 

26 For further discussion of the SSN mismatch program and the assertion of penalties, see, Mark 

W. Everson, Commissioner, Internal Revenue Service, Testimony Before the Subcommittee on Oversight 

of the House Committee on Ways and Means (February 16, 2006). 
8 

inaccurate SSN or TIN.27 The maximum penalty for any calendar year is $250,000. An 

employer can avoid the penalty if it is shown that the failure to provide correct information was 

due to reasonable cause and not willful neglect.28 

 27 Sec. 6721. 

28 Sec. 6724. 
9 

C. Confidentiality and Disclosure of Returns and Return Information 

In general

Section 6103 provides that returns and return information are confidential and may not be 

disclosed by the IRS, other Federal employees, State employees, and certain others having access 

to the information except as provided in the Code.29 A “return” is any tax or information return, 

declaration of estimated tax, or claim for refund required by, or permitted under, the Code, that is 

filed with the Secretary by, on behalf of, or with respect to any person.30 “Return” also includes 

any amendment or supplement thereto, including supporting schedules, attachments, or lists 

which are supplemental to, or part of, the return so filed. A Form W-2 is an information return 

and therefore, a return for purposes of section 6103. The Form W-2 is considered the return of 

both the employer and the employee to whom it relates. 

The definition of “return information” is very broad and includes any information 

gathered by the IRS with respect to a person’s liability or possible liability under the Code.31 

“Taxpayer return information” is a subset of return information. Taxpayer return information is 

return information filed with or furnished to the IRS by, or on behalf of, the taxpayer to whom 

 29 Sec. 6103(a). 

30 Sec. 6103(b)(1). 

31 Sec. 6103(b)(2). Return information is 

• a taxpayer’s identity, the nature, source, or amount of his income, payments, receipts, 

deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, 

deficiencies, overassessments, or tax payments, whether the taxpayer’s return was, is 

being, or will be examined or subject to other investigation or processing, or any other 

data, received by, recorded by, prepared by, furnished to, or collected by the Secretary 

with respect to a return or with respect to the determination of the existence, or possible 

existence, of liability (or the amount thereof) of any person under this title for any tax, 

penalty, interest, fine, forfeiture, or other imposition, or offense, 

• any part of any written determination or any background file document relating to such 

written determination (as such terms are defined in section 6110(b)) which is not open to 

public inspection under section 6110, 

• any advance pricing agreement entered into by a taxpayer and the Secretary and any 

background information related to such agreement or any application for an advance 

pricing agreement, and 

• closing agreement under section 7121, and any similar agreement, and any background 

information related to such an agreement or request for such an agreement, 

Return information does not include data in a form which cannot be associated with, or otherwise 

identify, directly or indirectly, a particular taxpayer. 
10 

the information relates. For example, information submitted to the IRS by a taxpayer’s 

accountant on behalf of the taxpayer is “taxpayer return information.” 

Section 6103 contains a number of exceptions to the general rule of confidentiality, 

which permit disclosure in specifically identified circumstances when certain conditions are 

satisfied.32 For example, section 6103(l) (relating to disclosures for purposes other than tax 

administration) contains more than 20 separate provisions permitting disclosures of specific 

items of return information to agencies such as the SSA, the Department of Labor, the Pension 

Benefit Guaranty Corporation, Federal, State and local child support agencies, and the 

Department of Education, among others, to administer specifically identified programs. 

Disclosures to the Social Security Administration

For purposes of administering the Social Security Act, the Code authorizes disclosure to 

the SSA, upon written request, of returns and return information relating to self-employment 

taxes (Chapter 2 of the Code); Federal Insurance Contributions Act (“FICA”) taxes (Chapter 21 

of the Code); and taxes withheld at the source on wages (Chapter 24 of the Code).33 

Documents which may be disclosed under this provision include but are not limited to: 

• Schedule C, Form 1040, Profit (or Loss) from Business or Profession, 

• Schedule E, Form 1040, Supplemental Income Schedule-Part III, Income or Loss 

from Partnerships, 

• Schedule F, Form 1040, Farm Income and Expenses, 

• Schedule SE, Form 1040, Computation of Social Security Self-Employment Tax, 

• Form 1065, U.S. Partnership Return of Income, 

• Form 941, Employer’s Quarterly Federal Tax Return, 

• Form 942, Employer’s Quarterly Tax Return for Household Employees or portions 

Schedule H, Form 1040, 

• Form 943, Employer’s Annual Tax Return for Agricultural Employees, 

• Form W-2, Wage and Tax Statement (limited to those portions of the W-2 relating to 

Chapters 21 and 24), 

 32 Sec. 6103(c) - (o). Such exceptions include disclosures by consent of the taxpayer, disclosures 

to State tax officials, disclosures to the taxpayer and persons having a material interest, disclosures to 

Committees of Congress, disclosures to the President, disclosures to Federal employees for tax 

administration purposes, disclosures to Federal employees for nontax criminal law enforcement purposes 

and to the Government Accountability Office, disclosures for statistical purposes, disclosures for 

miscellaneous tax administration purposes, disclosures for purposes other than tax administration, 

disclosures of taxpayer identity information, disclosures to tax administration contractors and disclosures 

with respect to wagering excise taxes. 

33 Sec. 6103(l)(1)(A). 
11 

• Return information related to the bullets above. 34

For administering section 1131 of the Social Security Act, section 6103(l)(1)(B) 

authorizes disclosure to the SSA of return information described in section 6057(d) pertaining to 

pension, profit-sharing, stock bonus plans, etc. to which part I of subchapter D of Chapter 1 of 

the Code applies. 35

Section 6103(l)(5) authorizes disclosure of information returns to the SSA for: (1) 

carrying out an effective returns processing program; (2) the Combined Annual Wage Reporting 

(“CAWR”) Program; and (3) certain disclosures for epidemiological and similar research. The 

information returns which may be disclosed under section 6103(l)(5) are those filed under Part 

III, Subchapter A, Chapter 61 of the Internal Revenue Code. These include primarily Form W-2; 

Form W-3 (Transmittal of Wage and Tax Statements); and Form 1099-R (Distributions from 

Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc).36 

Section 432 of the Social Security Act specifies that notwithstanding section 6103(a), 

such documents as necessary for CAWR processing will be made available to SSA. This allows 

any type of tax information to be disclosed where such disclosures are necessary for CAWR. 

Section 6103 and the Illegal Immigration Reform and Immigrant Responsibility Act of 

1996

Section 6103(a) provides “Returns and return information shall be confidential [and shall 

not be disclosed] except as authorized by the title.” Consistent with tenets of statutory 

construction, it has been a long-standing interpretation of the IRS that, unless a provision of law 

outside the Code explicitly overrides section 6103 by specifically identifying it, a statute of 

general application (i.e. “notwithstanding any other law”) does not override the restrictions of 

section 6103 on the disclosure of returns and return information.37 The Illegal Immigration 

Reform and Immigration Responsibility Act of 1996 requires the Commissioner of Social 

Security to report to the Attorney General the names and addresses of aliens who are not eligible 

 34 Internal Revenue Service, Internal Revenue Manual, Disclosure of Official Information: 

Administration of the Social Security Act - Social Security Administration, Ch. 11.3, sec. 11.3.29.3 (05-

27-2005). 

35 Section 6057(d) covers statements, notifications, reports and other information received by the 

IRS pursuant to the annual plan registration requirements of section 6057. Section 1131 of the Social 

Security Act relates to notification of Social Security claimant with respect to deferred vested benefits. 

36 Internal Revenue Service, Internal Revenue Manual, Disclosure of Official Information: 

Disclosure of Information Returns to Social Security Administration, Ch. 11.3, sec. 11.3.29.3.2 (05-27-

2005). 

37 See, Office of Tax Policy, Department of the Treasury, Report to the Congress on Scope and 

Use of Taxpayer Confidentiality and Disclosure Provisions, Volume I: Study of General Provisions

(October 2000) at 37. 
12 

for employment but who had Social Security earnings.38 The provision does not specifically 

override section 6103. If this information is derived from return information furnished to the 

Social Security Administration, such as form W-2, the information is protected by section 6103, 

which does not provide a specific exception covering this type of disclosure. 

The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 also provides 

that information concerning illegal alien status should be provided to the Immigration and 

Naturalization Service notwithstanding any other law.39 The Treasury Inspector General for Tax 

Administration has noted that the IRS is not providing information about a taxpayer’s illegal 

alien status that the IRS may have obtained as a result of an application of ITIN or otherwise 

because the provisions does not specifically override section 6103.40

Safeguards to prevent, and penalties applicable to, the unauthorized disclosure or 

inspection of return information

Criminal penalties for unauthorized disclosure 

The willful unauthorized disclosure of tax information is a felony punishable by a $5,000 

fine, up to five years imprisonment, or both.41 Willful unauthorized inspection of tax 

information is a misdemeanor punishable by a $1,000 fine, up to one-year imprisonment or 

both.42 Federal employees and officers are required to be discharged from employment upon 

conviction of willful unauthorized disclosure or inspection. 

Civil penalties for unauthorized disclosure or inspection

An action for damages against the United States is permitted when any Federal officer or 

employee knowingly or by reason of negligence inspects or discloses tax information in violation 

 38 8 U.S.C. sec. 1360(c)(2). That section provides: 

(2) If earnings are reported on or after January 1, 1997, to the Social Security 

Administration on a social security account number issued to an alien not authorized to 

work in the United States, the Commissioner of Social Security shall provide the 

Attorney General with information regarding the name and address of the alien, the name 

and address of the person reporting the earnings, and the amount of the earnings. The 

information shall be provided in an electronic form agreed upon by the Commissioner 

and the Attorney General. 

39 8 U.S.C. secs. 1360(b) and 1730. 

40 Treasury Inspector General for Tax Administration, The Internal Revenue Service’s Individual 

Taxpayer Identification Number Program Was Not Implemented in Accordance with Internal Revenue 

Code Regulations (September 1999). 

41 Sec. 7213(a)(1). 

42 Sec. 7213A(a)(2)(b). 
13 

of any provision of section 6103.43 A plaintiff is entitled to: (1) actual damages sustained as a 

result of unauthorized disclosure (including punitive damages for willful or grossly negligent 

disclosures), or (2) liquidated damages of $1,000 per disclosure, whichever is greater, as well as 

costs of the action and in certain cases, attorney fees. No liability arises from a good faith but 

erroneous interpretation of section 6103 or a disclosure made at the request of the taxpayer. 

Safeguards

Section 6103 requires as a condition for receiving tax information, that recipient agencies 

establish, to the satisfaction of the IRS, physical, administrative and technical safeguards to the 

protect the confidentiality of the information received.44 Such safeguards include a standardized 

system of records with respect to requests for disclosure of tax information and the reason for 

such disclosure, secure storage for the tax information, restrictions which limit access to the tax 

information to persons whose duties and responsibilities require access, and other safeguards as 

the IRS deems appropriate. The IRS is to review the safeguards established by such agencies. 

 43 Sec. 7431. 

44 Sec. 6103(p)(4). See also Internal Revenue Service, Publication 1075, Tax Information 

Security Guidelines for Federal, State and Local Agencies: Safeguards for Protecting Federal Tax 

Returns and Return Information (Rev. 6/2000). 
14 

II. DESCRIPTION OF THE TAX PROVISIONS IN THE COMPREHENSIVE 

IMMIGRATION REFORM ACT OF 2006 

A. Tax Liability of Alien Employees 

Section 601 of the bill sets forth requirements for individuals to obtain an adjustment of 

alien status. One such requirement is that the alien be employed in the United States, in the 

aggregate, at least three years during the five-year period ending on April 5, 2006 and at least six 

years after the date of enactment of the bill (the “employment period”). In addition, the alien 

must establish by a date no later than the date on which status is adjusted, that he or she has paid 

any Federal tax liabilities, including penalties and interest, for any year during the employment 

period for which the statutory period for assessment has not expired. 

Under the provision, the alien may establish that he or she has paid any Federal tax 

liability for the employment period by establishing that: (1) no such tax liability exists; (2) all 

outstanding liabilities have been paid; or (3) the alien has entered into an agreement for payment 

of all outstanding liabilities with the IRS. The Secretary is required to establish rules and 

procedures under which the IRS shall provide documentation to assist aliens in establishing that 

they have satisfied outstanding Federal tax liabilities. 

Under the provision, aliens who are required to establish that they have paid any Federal 

tax liability are prohibited from receiving a refund of an overpayment of tax for any taxable year 

prior to 2006. In addition, such aliens are prohibited from filing a claim for the EIC or any other 

credit otherwise allowable under the Code for any taxable year prior to 2006. 
15 

B. Employer Absolution from Civil and Criminal Tax Liabilities 

Section 601 of the bill enables employers who may have hired workers illegally to be 

absolved of all civil and criminal tax liabilities relating directly to the employment of an alien 

who is applying for an adjustment of status. The tax provision states in its entirety: 

Immigration Status of alien.−Employers of aliens applying for adjustment of 

status under this section shall not be subject to civil and criminal tax liability 

relating directly to the employment of such alien. 

As drafted, the provision exempts the employer from all civil and criminal tax liability 

(tax, penalties, and interest) arising from the employment of such an alien, without clearly 

providing a statutory limit on the tax periods to which the exemption applies. The provision 

does not require as a condition of exemption, that the employer take any specific action to assist 

the employee in connection with the adjustment of status.45 

 45 By contrast, in order to avoid civil and criminal liability under section 8 U.S.C. 274A for 

employing unauthorized aliens, the employer is required to provide such unauthorized aliens “with copies 

of employment records or other evidence of employment pursuant to an application for adjustment of 

status under this section or any other application or petition pursuant to other provisions of the 

immigration laws.” 
16 

C. Section 6103 Provisions 

Overview

The bill amends section 6103 to require SSA, upon written request of the Secretary of 

Homeland Security, to disclose certain return information to Department of Homeland Security 

(“DHS”), and its contractors. The provision requires the disclosure of taxpayer identity with 

respect to employers required to participate in the Electronic Employee Verification System and 

their employees, including all new hires. The provision also permits the disclosure of taxpayer 

identity with respect to employers receiving no-match notices and submitting information returns 

with duplicate TINs. The provision also requires the disclosure of the identity of employers 

filing Forms W-2 with respect to the same employee when SSA has reason to believe those 

forms contain evidence of identity fraud. 

The use of the disclosed information is restricted to establishing and enforcing employer 

participation in the Electronic Employee Verification System proposed by the bill, carrying out 

non-criminal law aspects of certain provisions of the Immigration and Nationality Act, and the 

civil operation of the Alien Terrorist Removal Court. The provision sunsets three years after the 

date of enactment. 

Section 6103 amendment to facilitate implementation of the Electronic Employee 

Verification System

The bill contains amendments to section 6103 to facilitate the implementation of the 

bill’s Electronic Employee Verification System (“EEVS”).46 Under the bill, DHS and SSA are 

to implement the system to determine whether the information provided by employees to 

employers – name, social security number, date of birth, place of birth, employer identification 

number and alien registration number, if applicable − is consistent with the information the 

agencies maintain, and whether or not the employee is eligible to work in the United States. 

Every employer must submit employee data for new hires to the system beginning 18 months 

after the DHS receives the funds necessary to implement the system. The Secretary of 

Homeland Security can allow employers to participate on a voluntary basis before that date and 

the Secretary of Homeland Security can require employers critical to homeland security to 

participate before full implementation. The Secretary of Homeland Security can also require 

individual employers to participate prior to full implementation if the Secretary of Homeland 

Security has reasonable cause to believe they have violated immigration laws. 

The bill amends section 6103 to require, upon written request of the Secretary of 

Homeland Security, SSA to disclose certain return information to DHS, and its contractors. In 

particular, the bill permits SSA to disclose the taxpayer identity information of employers that 

SSA has reason to believe have failed to register and participate in EEVS. This belief is based 

on a comparison of information submitted to SSA by DHS and tax information in the possession 

of SSA (e.g., Form W-2). The bill also permits SSA to disclose the taxpayer identity information 

 46 Sec. 301 of S. 2611 as passed by the Senate. 
17 

of all employees of the nonparticipating employer hired after the date the employer is required to 

participate in EEVS. 

SSA is required to disclose the taxpayer identity information of all employees of 

employers designated by DHS as a “critical employer” based on an assessment of homeland 

security or national security needs or of employers required to participate in EEVS because DHS 

believes the employer has engaged in material violations involving the employment of illegal 

aliens. The bill also requires SSA to disclose the taxpayer identity information of employers 

participating in EEVS and of all new hires of such employer based on the date the employer 

begins participation in EEVS or since the date of the last DHS request for such information. 

Disclosure of return information relating to no-match notices and use of duplicate TINs

Upon written request from the Secretary of Homeland Security, SSA is required to 

disclose taxpayer identity information of employers who have submitted tax information with 

more than 100 names and TINs that do not match SSA records, or who have submitted more than 

10 forms W-2 with employees all sharing the same TIN. SSA also is required to disclose upon 

written request of the Secretary of Homeland Security, the taxpayer identity information of 

employers who have filed information returns SSA believes contains evidence of identity fraud 

due to the multiple use of the same TIN of an employee (multiple employers filing information 

returns with respect to the same employee). 

DHS contractor compliance with confidentiality safeguards

The provision requires that DHS conduct on-site reviews every three years of all of its 

contractors or other agents receiving Federal tax information. If the duration of the contract or 

agreement is less than one year, a review is required at the mid-point of the contract. The 

purpose of the review is to assess the contractor’s efforts to safeguard Federal tax information. 

This review is intended to cover secure storage, restricting access, computer security, and other 

safeguards deemed appropriate by the Secretary. Under the provision, DHS is required to submit 

a report of its findings to the IRS and certify annually that such contractors and other agents are 

in compliance with the requirements to safeguard the confidentiality of Federal tax information. 

The certification is required to include the name and address of each contractor or other agent 

with the agency, the duration of the contract, and a description of the contract or agreement. 
18 

III. ISSUES RELATED TO THE TAX PROVISIONS IN THE COMPREHENSIVE 

IMMIGRATION REFORM ACT OF 2006 

A. Federal Tax Liability of Aliens 

The bill requires an alien applying for adjustment of status to establish that he or she has 

paid any outstanding Federal tax liabilities for any taxable year during the employment period 

for which the statutory period for assessment has not expired. Although the employment period 

for this purpose may be eight years or longer, the period for which the alien is required to 

establish payment for outstanding tax liabilities is shortened considerably by the rule referencing 

the general three-year statutory period for assessing a tax. Generally, the period for assessing an 

addition to tax is three years from the date a return is filed. Thus, under the bill, if an alien has 

filed tax returns for the years covered by the employment period, the alien will only be required 

to pay outstanding tax liabilities (if any) for the three-year period prior to the date the alien’s 

status is adjusted to meet the requirements of the bill. On the other hand, if the alien has not filed 

a tax return for any year during the entire employment period, the statute of limitations remains 

open and the alien will be required to pay any outstanding liabilities for that year. In any event, 

the IRS’s ability to collect assessed liabilities is unaffected. Generally the IRS has a 10-year 

statute of limitations on collection. 

The bill also prohibits aliens who are required to establish that they have paid any Federal 

tax liability from receiving a refund of an overpayment or from filing a claim for any credit 

otherwise allowable under the Code for any taxable year prior to 2006. Under present law, 

however, a taxpayer may file a refund claim within three years of the filing of the tax return or 

within two years of the payment of tax, whichever is later. Thus, the provision in the bill would 

have the effect of denying refunds to some alien taxpayers who would not otherwise be time 

barred from obtaining a refund under the Code. Similarly, the provision prohibits alien taxpayers 

from claiming any credit otherwise allowable under the Code. This disallowance applies not 

only to the EIC, which is not available to aliens filing with ITINs under present law, but also to 

any credit that may reduce taxes, such as the child tax credit or the dependent care credit. To the 

extent illegal aliens are required to pay taxes notwithstanding their immigration status, some may 

question the fairness of prohibiting aliens from recovering an overpayment of taxes or reducing 

their tax liability by otherwise allowable credits. 

In addition, the bill may result in disparate treatment of alien taxpayers based on when 

the application for adjustment of status is filed. By its terms, the provision only denies refunds 

and credits to alien taxpayers filing an application for adjustment of status. The bill, however, is 

not clear as to when an alien must file an application for adjustment of status. As one of the 

requirements for adjustment of status is that the alien be employed at least six years after the date 

of enactment, there may be instances in which the alien does not file an application for 

adjustment of status until after the general period for filing a claim for refund for the 2006 year 

would have expired, notwithstanding the limitations in the bill. In such cases, for example, the 

limitation on refunds in the bill may have no effect on alien taxpayers. In other cases, an alien 

taxpayer may apply for adjustment of status before the general period of limitations for obtaining 

a refund has expired. When attempting to establish that he or she is has paid any Federal tax 

liability for the employment period, the alien may learn he is entitled to a refund for a taxable 

year prior to 2006, but the bill would deny a refund in this case. Thus, aliens who are otherwise 
19 

similarly situated may receive different tax treatment based solely on when an application for 

adjustment of status is filed. 

In addition, the provision creates potential administrative problems. As discussed, the 

provision only denies refunds and credits to alien taxpayers filing an application for adjustment 

of status. The IRS, however, may not be able to determine the identity or timing of aliens filing 

applications. Under present law, the IRS has the ability to identify aliens who do not have and 

are not eligible to receive SSNs, i.e., those taxpayers using ITINs. Under the bill, however, 

aliens satisfying certain eligibility requirements will receive SSNs allowing them to obtain 

employment. Without a system for identifying aliens filing applications for adjustment of status, 

the IRS will lose the ability to identify those taxpayers who are not eligible to receive refunds or 

credits. Moreover, it is unclear whether the restrictions on the ability of aliens to claim otherwise 

allowable credits apply to tax returns filed prior to the filing of an application of adjustment, nor 

is it clear how the IRS would administer such a rule if that were the case. 
20 

B. Employer Protection from Employment Taxes 

The bill relieves an employer of all civil and criminal tax liability directly related to the 

employment of a person applying for an adjustment of status. Some would argue that such a 

provision is necessary because an alien has to prove employment as part of the application for 

adjustment of status, which would identify the employer of the illegal alien. An employer might 

deny that he employed such individual if such an admission could be used by the IRS to assess 

taxes and penalties against such employer. 

However, the bill provides for the confidentiality of information furnished by the 

applicant: “Except as otherwise provided in this section, no Federal agency or bureau, nor any 

officer or employee of such agency or bureau, may (A) use the information furnished by the 

applicant pursuant to an application filed [relating to earned adjustment for principal aliens, their 

spouses and children] for any purpose other than to make a determination on the application; 

(B) make any publication through which the information furnished by any particular applicant 

can be identified; or (C) permit anyone other than the sworn officers and employees of such 

agency, bureau or approved entity, as approved by the Secretary of Homeland Security, to 

examine individual applications that have been filed.” There is an exception to this general rule 

of confidentiality that allows DHS and the Department of State to respond to written requests for 

information from a duly recognized law enforcement entity in connection with a criminal 

investigation or prosecution, or a national security investigation or prosecution. It appears that 

the IRS would have to request information in connection with a criminal investigation to get 

access to the contents of the application, and it appears that the IRS would not have access to the 

application information for civil purposes, as DHS would be barred from affirmatively disclosing 

such information and a request from the IRS for civil purposes could not be honored. 

In addition, it appears that the employer would be absolved of liability even if the IRS 

independently developed the case without having access to the application materials. Further, 

the employer receiving this protection from tax, penalties and interest is not required to do 

anything to affirmatively assist the applicant with the application. The employer is not required 

to furnish proof of employment or other documentation to the alien applying for an adjustment of 

status. 

Some may argue an exemption from all tax liabilities, civil and criminal, for the 

employer, is inconsistent with the provisions requiring the alien to satisfy all of the alien’s tax 

liabilities arising out of that same employment. The employer has likely enjoyed the benefit of 

deducting the alien employee’s wages as a business expense and some would argue that such 

employers should also bear the burden of the taxes associated with the employment of such alien. 

Still others might argue that such an exemption is unfair to employers who were compliant with 

their employment tax obligations, notwithstanding the illegal status of the employee. Finally, 

some might argue that an exemption for all tax liabilities is overly broad and provides an 

incentive for employers to hire illegal aliens, for whom employers are not required to pay 

employment taxes under the bill, over U.S. citizens and resident aliens, for whom employers 

remain liable for all employment taxes. 
21 

C. Section 6103 Issues 

In general

Section 6103 reflects the balance between the needs of Federal agencies for information 

and a citizen’s right to privacy. While it may be easier for government agencies to obtain 

information from the IRS, it has been argued that tax returns are completed by taxpayers for use 

by the IRS, and the IRS should not be a lending library for government as a whole. Taxpayers 

have a legitimate expectation of privacy in their communications with the IRS. This expectation 

of privacy promotes tax compliance. On the other side are the needs of government agencies to 

obtain information necessary to perform their duties efficiently and effectively. 

Provisions may result in the disclosure of taxpayer information unrelated to immigration 

violations

DHS has asserted that the volume of records in possession of SSA for which the name 

and SSN do not match is an indication of widespread evasion of the immigration laws.47 DHS 

has noted that very few employers respond to SSA’s letters regarding no matches. “[G]iven the 

fact that simple errors can be corrected easily by both the employer and the employee, the 

extremely low return rate signals that an overwhelming percentage of the ‘no match’ instances 

cannot be explained by legitimate discrepancies and . . . suggests an attempt to obtain 

unauthorized employment through means of fraudulent SSNs.”48 The identity of the employer 

taken from a Form W-2, and the fact the employer filed a Form W-2 with incorrect information 

is all “return information” within the meaning of section 6103. 

The Senate bill requires SSA to provide to DHS the taxpayer identity of employers with 

more than 100 instances of no-match information. It is not clear that “no-match” information 

directly relates to the employment of an illegal alien. A name and social security number may 

not match because an individual has changed her name as a result of marriage or divorce. A no 

match may be the result of transcription errors, name similarities, or other factors unrelated to the 

person’s immigration status. Some no matches result because instructions have been issued to 

employers who file their earning reports electronically to use all zeros in the SSN field when 

they do not have a number for their worker. For these reasons, some might argue that the 

information may not provide DHS with data that provides useful leads in discovering 

immigration violations. 

On the other hand, a single employer with more than 100 instances of no-match 

information for its employees may be a significant indicator that the employer is hiring people 

who are ineligible to work in the United States and who are using stolen or fictitious TINs. One 

could argue that limiting the disclosure to employers that have more than 100 “no matches” 

targets the information to those employers for which further investigation might be most fruitful. 

 47 Stewart A. Baker, Assistant Secretary for Policy, U.S. Department of Homeland Security, 

Testimony Before the Subcommittee on Oversight of the House Committee on Ways and Means (February 

16, 2006). 

48 Id. 
22 

However, the significance of 100 instances of no match information may depend on the size of 

the employer. For example, an employer with thousands of employees and multiple geographic 

locations, 100 instances of no match information may not be as significant as it would be for a 

smaller employer having incorrect SSNs for half of its workers. In addition, increased 

enforcement by DHS. In addition, it should be noted that increased enforcement by DHS may 

have an adverse effect on tax compliance as currently tax compliant employers stop filing Forms 

W-2 for their employees in order to avoid detection by DHS. 

The Senate bill also requires the disclosure of the identity of multiple employers 

reporting wages for the same employee, if SSA has reason to believe identity fraud is involved 

based on a comparison with information submitted to SSA by DHS. This provision may be 

overly broad as many persons have more than one job in a single tax year and the fact that 

multiple employers have filed Forms W-2 with respect to an employee does not necessarily 

indicate a violation of the immigration laws. 

Authorizing disclosure of return information for purposes of enforcing EEVS may be 

premature and affect the privacy of millions of workers

The section 6103 amendments of the Senate bill are intended to serve as a backstop for 

the EEVS system by relying on Forms W-2 and will result in the dissemination of taxpayer 

identity information (name, address, and TIN) of both authorized and unauthorized workers. The 

bill requires the disclosure to DHS of the taxpayer identity information of each new employee 

and the taxpayer identity of their employer. That could potentially result in the disclosure of 

information relating to millions of taxpayers. Taxpayer identity is sensitive information, the 

unauthorized release of which can result in identity fraud and other harm. 

The provisions permit disclosures not only to officers and employees of DHS but to 

contractors of DHS as well. The more widespread the dissemination of return information, the 

more opportunities there are for unauthorized disclosures of such information to occur. Thus, 

some may be concerned that a data breach could jeopardize the privacy of a significant number 

of taxpayers, the majority of whom will not be illegal aliens. It also stretches the resources of the 

IRS to review the safeguards of an agency as large as DHS, as well as its contractors. 

Some may argue that the EEVS system proposed by the Senate bill should be operational 

before the disclosure of return information is contemplated. In this manner, the extent of the 

need for return information could be evaluated based on how well the system has operated 

without such information. It should be noted that since the Form W-2 is filed after the close of 

the calendar year, such forms do not provide a current snapshot of an employer’s employees. In 

fact, many employees may leave their employers during the calendar year and many more may 

leave before DHS may begin an investigation of the employer. Some employers may find it 

difficult to obtain information from former employees to prove their legal status. Thus, some 

may argue that information more current than Form W-2 should be relied upon for enforcement 

of the EEVS. 
23 

D. Indirect Effects on Revenues Resulting from Immigration Reform 

Effects on tax compliance as a result of the EEVS

S. 2611 establishes the EEVS. It can be anticipated that that certain illegal aliens 

currently using IRS-issued ITINs for filing tax returns, and the withholding of income and 

employment taxes would stop using ITINs for these purposes. This decline in use may arise 

because an ITIN would be an indicator of ineligibility for employment under EEVS for illegal 

aliens. However, over time, some, but not all, of these individuals may gain legal employment 

status under various provisions in the underlying bill. 

The decline in the use of ITINs may result in increased noncompliance with the tax laws; 

e.g. reduced filing of tax returns, and reduced withholding of income and employment taxes. For 

example, the bill could result in a reduction in the amount of Old Age, Survivors, and Disability 

Insurance (“OASDI”) employment taxes withheld. On the other hand, while fewer income tax 

returns will be filed by illegal aliens, these returns have a negative average income tax rate due to 

refundable credits (i.e, the taxpayer is due a refund). As a result, income tax revenues (relative 

to the present-law baseline) would increase when these returns are no longer filed. 

Other tax effects 

The legalization provisions of this bill have a number of tax consequences. Overall, the 

bill could result in an increase in the number of alien workers employed in the United States for 

whom taxes are withheld both for individual income tax and employment tax purposes, 

notwithstanding the employer protection provisions discussed above. To the extent that a higher 

portion of current wages paid are reported by employers to the IRS, there would be an increase in 

the amount of deductions taken by employers with respect to those wages. The bill also would 

increase the number of workers who are eligible to claim refundable tax credits. For example, 

the EIC requires that taxpayers and their otherwise qualifying children have a SSN that is valid 

for employment. As a result of the bill, it is expected that there will be an increase in the number 

of workers and their children who will satisfy this requirement. It is expected that this will 

increase the amount of refundable tax credits claimed. Similarly, the guest worker provisions of 

the bill would increase the number of workers with withholdings for individual income and 

employment taxes and refundable tax credits.