The IRS and Department of Homeland Security have reached a memorandum of understanding (MOU) allowing the IRS to provide taxpayer information to Immigration and Customs Enforcement (ICE) to aid mass deportation efforts.
The MOU relies on a specific exemption to taxpayer confidentiality rules and refers to a statute for immigrants with final deportation orders. The number of taxpayers whose personal information would potentially be shared ranges from 0.7 to 7 million. Litigation is ongoing. A separate implementation agreement between IRS and ICE is to come. Various experienced leaders at the IRS, including former Acting Commissioner Melanie Krause, have since resigned.
Although the MOU’s goal may be to facilitate the removal of individuals who are in the US without proper authorization, it may have downstream consequences for the fiscal health of the country, effective governance and data practices, and the well-being of US citizens and lawful residents.
It may reduce tax revenues
Sharing taxpayer data with ICE may reduce how much federal taxes the agency collects because undocumented immigrants currently filing taxes may be intimidated or deported. And in the coming years, some undocumented immigrant families may shift employment to the informal sector where employers do not withhold and report taxes to the IRS, further reducing tax revenues.
Voluntary compliance, or most Americans filing taxes accurately and on time, is the bedrock of our tax system. The voluntary compliance rate is currently 85 percent, and estimates show that even a one percentage point reduction would decrease federal revenues by $40 billion.
Undocumented immigrants currently pay various federal, state, and local taxes while remaining ineligible for many benefits, including Social Security. Independent estimates suggest undocumented immigrants pay about $60 billion in federal income and payroll taxes each year, and an additional $37 billion in state and local taxes. As a result of the MOU, and depending on assumptions about taxpayers’ and employers’ responses, the federal government may lose between $147 and $479 billion in the next 10 years.
It may undermine effective governance and data practices
Historically, the IRS has kept taxpayer information highly confidential. Some protections were enacted back in 1976 after the Nixon Administration had pursued IRS records to target opponents.
Section 6103 of the tax code does allow for Congressionally approved uses of tax data outside of direct tax administration, such as for US Census Bureau’s research and for certain criminal cases unrelated to taxes. It does not have a stated exception for mass immigration enforcement.
And, note that IRS data can be messy. Without a doubt, there will be some errors when linking IRS and ICE data which will lead to incorrect conclusions and add administrative errors in deportation efforts. It is unclear who will provide the necessary oversight and transparency to ensure that the IRS and ICE are adhering to rigorous data practices.
It may worsen the well-being of many children and families
Small business owners, essential workers, and parents of young US citizens have relied on the IRS securing their personal and financial data when applying for and renewing their individual taxpayer identification numbers (ITINs). Since the program’s inception, the IRS has issued over 25 million ITINs, with over 5 million active ITINs as of December 2022.
ITIN filers include undocumented immigrants and lawfully present students, survivors of domestic violence, and dependents of temporary workers. Some even hoped that working and paying taxes on time will help them someday achieve legal status by showing good faith and moral standing.
Importantly, the MOU may have chilling effects on more than undocumented immigrants. Naturalized citizens, permanent residents, and those on work visas may withdraw from participating in public life and exercising their rights. For example, immigrant families may avoid health care or social services if they perceive risks, even when they have done nothing wrong, which could have negative impacts on the well-being of our wider communities.
Such withdrawal can impact how many people file taxes, hold formal jobs where taxes are withheld from their paychecks, and claim certain tax benefits they are eligible for, because of fears of how their tax data could be used for purposes of being questioned, detained, or deported.
Urban Institute’s research showed 29 percent of adults in all immigrant families, and up to 60 percent of those in mixed-status families (which include undocumented immigrants and others who either have lawful immigration status or US citizenship), worried about essential activities because they did not want to draw attention to their or a family member’s immigration status. These estimates reflect immigrant families’ perspectives after the 2024 election, when the incoming Trump Administration had publicized their immigration stance. Five months later, as those policies come into effect, these numbers may grow higher.
Many taxpayers, including families with US citizens who might be intimidated by the new use of tax data for immigration enforcement, may miss out on the child tax credit. This benefit would help them afford basic needs like groceries, child care, housing, and transportation.
In all, this MOU feels like déjà vu to erstwhile “public charge” rule debates, but with more serious legal and administrative concerns.
The US tax system is not better off when taxpayers, regardless of their immigration status, are fearful about what will happen to them and their families. This IRS-ICE data sharing agreement, as stated, may have downstream consequences for tax revenues, robust government data practices, and the health of our wider communities.
