IRS Agreement with ICE to Share Immigrant Tax Data Could Lead to Billions in Lost Revenue

Why the IRS-ICE Information Sharing Agreement Could Undermine Tax Compliance and Harm U.S. Revenue

A new agreement between the Internal Revenue Service (IRS) and U.S. Immigration and Customs Enforcement (ICE) is stirring alarm among immigrant communities and tax experts. Under this agreement, certain tax information filed by undocumented immigrants will be shared with ICE, despite longstanding precedents that had previously kept tax records protected from immigration enforcement. This change has the potential to drastically reduce tax compliance among immigrant populations, thereby leading to a significant decrease in federal and state revenue.

In 2022 alone, undocumented immigrants contributed an estimated $96.7 billion in federal, state, and local taxes. Of this, $59.4 billion went to the federal government, and $37.3 billion supported state and local budgets. But with this new policy in place, experts warn that if even 10% fewer undocumented immigrants file their taxes, it could result in a $9.5 billion annual loss in tax revenue.

Why This Matters

Undocumented immigrants have long filed taxes in the U.S. using the Individual Taxpayer Identification Number (ITIN), introduced by the IRS in 1996. This allowed millions to contribute to the nation’s fiscal system, despite lacking Social Security numbers. For years, immigrant advocacy groups and legal experts reassured these taxpayers that their filing information would not be used against them in immigration enforcement.

However, with the current IRS-ICE agreement, this protection has been shattered. Critics argue that this move will drive a wedge between immigrant communities and the U.S. government, severely undermining voluntary compliance with the tax system. Tom Bowman, policy counsel at the Center for Democracy and Technology, warns that this policy change will “significantly impact tax revenue” by discouraging immigrant participation in the tax system.

The consequences are profound. Should tax filings from undocumented immigrants drop, the resulting revenue shortfall would have trickle-down effects on critical government programs such as Social Security and Medicare. Ironically, undocumented immigrants themselves are not eligible for these benefits, yet they continue to contribute to these programs through their taxes.

Long-Term Implications

The full impact of this policy will likely take years to manifest, but there are several long-term implications for both the U.S. economy and the immigrant community:

1. A Potential Decline in Tax Compliance:
   As immigrant communities fear deportation, they may choose to forgo filing taxes altogether. This could lead to lower compliance rates across the country, creating a substantial revenue gap. According to the Institute on Taxation and Economic Policy, even a modest 10% reduction in immigrant tax filings could reduce federal tax revenues by $8.6 billion and state/local revenues by $900 million annually.
2. Weakened Public Trust in Government:
   This policy may erode trust between immigrant communities and government institutions. As Murad Awawdeh, President of the New York Immigration Coalition, points out, this isn’t just an attack on undocumented immigrants — it undermines the trust of all people who reside in the U.S. “It’s an attack on all people who call this country home,” he said.
3. Increased Fiscal Burden on Citizens:
   Reduced tax revenue could place greater financial strain on American citizens, as less money is available to fund essential public services. Tom Bowman highlights that this lost revenue would limit funding for important federal programs, which could lead to a higher tax burden for other taxpayers.
4. Erosion of Immigrant Contributions to the U.S. Economy:
   Immigrants, especially those without legal status, are integral to the U.S. economy. Whether as workers in agriculture, construction, or hospitality, many undocumented individuals contribute significantly to the country’s economic output. The IRS-ICE data-sharing agreement risks alienating these workers, leading to a decrease in their contributions.

What Needs to Be Done

To mitigate the long-term damage caused by this policy, several immediate actions need to be taken:

1. Reaffirm Taxpayer Privacy Protections:
   Congress and the IRS must work to reinstate strong privacy protections for taxpayers, ensuring that tax information cannot be weaponized for immigration enforcement. Restoring the longstanding policy of non-disclosure would prevent further erosion of trust in the U.S. tax system.
2. Support Immigrant Tax Compliance:
   The IRS should actively work with immigrant advocacy groups to reassure undocumented taxpayers that they can continue to file taxes without fear of deportation. Clear communication and protections must be in place to encourage tax participation.
3. Invest in Education and Outreach:
   Both federal and state governments should fund outreach programs to educate immigrant communities on their rights and obligations regarding taxes. These programs should aim to build trust and reinforce the importance of paying taxes, which directly benefits the broader U.S. economy.
4. Reevaluate the Policy’s Economic Impact:
   Policymakers must carefully assess the broader economic implications of this policy. They should consider revisiting the agreement if the revenue losses, decreased tax compliance, and broader economic consequences outweigh its intended goals.

Real-World Reference

Historically, efforts to weaponize tax data for immigration enforcement have led to major backlashes. The 1970s saw President Nixon attempting to use IRS information against political adversaries, which led to sweeping reforms aimed at protecting taxpayer privacy. This context highlights the current policy’s potential for political overreach and its deepening of a divide between immigrant communities and government institutions.

The IRS-ICE agreement could backfire in profound ways. As someone who has analyzed tax policies across multiple jurisdictions, it’s clear that this policy change isn’t just a political issue; it’s an economic one. By undermining tax compliance, the U.S. risks losing billions in tax revenue, which would only exacerbate existing fiscal challenges. This policy threatens not only the immigrant community but the broader economic health of the country.

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