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Undocumented immigrants venture to the United States from all parts of the world and endure enormous challenges in their new life, ranging from cultural ones to those that are language-oriented in nature. Another challenge for undocumented immigrants is compliance with our nation's tax system. This analysis provides a guide for undocumented immigrants and their advisers to follow in order to comply with U.S. tax rules, highlighting areas that need special attention.
Discussions of how to address the problem of undocumented immigration are a prominent feature of the political landscape. But whatever the political approach may be toward addressing undocumented immigration, the Internal Revenue Code is indifferent: Its sole concern is that those individuals who live and work in the United States and engage in various business dealings properly pay the taxes it imposes. Indeed, while many harbor the false impression that undocumented immigrants pay no tax, the truth is the opposite: Multiple studies indicate that undocumented immigrants contribute a great deal of funds to the coffers of federal, state, and local governments.1
This article provides an overview of the taxation of undocumented immigrants. First, it examines undocumented immigrants' tax status, how undocumented immigrants find gainful employment, and the nature of individual taxpayer identification numbers (ITINs). With this background in mind, the article next summarizes typical tax issues undocumented immigrants face in the workplace as well as the unique tax issues they confront, followed by a discussion of their tax-filing responsibilities.
Tax status
In ascertaining the tax status of individual taxpayers, the Code splits non-U.S. citizens into two categories: residents and nonresidents. Resident taxpayers pay tax on their worldwide income.2 By contrast, nonresident taxpayers generally pay tax only on their U.S.-source income.3 As defined in Sec. 7701(b), resident taxpayers include:
* An individual who is a lawful permanent resident of the United States at any time during a calendar year (i.e., a green card holder);4
* An individual who meets the substantialpresence test;5 or
* An individual who, in the year they arrive in the United States, qualifies to make and makes an election to be treated as a U.S. resident for that year (first-year election).
All other non-U.S.-citizen taxpayers are, by default, deemed nonresidents.7
To meet the substantial-presence test, an individual must be physically present...