Can New Mexico Refuse Tax Refunds to Immigrants?

New Mexico is holding on to more than $4 million in tax refunds from thousands of undocumented immigrants. They're suing the state to get their money back.
by | April 15, 2016
New Mexico Gov. Susana Martinez is enforcing a policy to withhold tax returns from filers who don't have proper Social Security numbers. AP

Even though he is an immigrant with no Social Security number, Roberto Sanchez filed income tax returns with the state of New Mexico every year for nearly decade without incident. Every year at tax time, he used an ID number issued by the federal government instead of a Social Security number on his tax forms.

But when it came time to file his 2012 taxes, Sanchez could not get his state tax refund. It was the second year of Gov. Susana Martinez’s term, and the new Republican governor had won office promising to crack down on illegal immigration. The state tax agency sent Sanchez a letter saying there was a “discrepancy” in his returns. Sanchez enlisted the volunteer help of an attorney to recover his return of $219.

The next year, it got worse. Not only did the New Mexico Taxation and Revenue Department refuse to issue Sanchez his return of $329, the agency claimed that Sanchez actually owed the state $291 instead. The agency said the ID number from his tax returns didn’t match the Social Security number on his W-2 yearly income statement, so it claimed Sanchez owes penalties and interest. Sanchez couldn’t collect the money this time, so he sued the state to get his money back.

Several immigrant rights groups are backing Sanchez and three other immigrants in similar lawsuits against the state, which could have far-reaching consequences. Between 2012 and 2014, New Mexico challenged the validity of 14,500 tax returns worth more than $4 million. The legal action also highlights the divergent ways states handle tax returns from immigrants, as they weigh the fear of fraud against the need for fairness.

David Urias, an Albuquerque lawyer who is part of the team representing Sanchez, said New Mexico is targeting immigrants because it assumes most won’t follow up with the department’s demands for more documentation.

“A lot of times we hear this myth that immigrants don’t pay taxes when they’re here. [But] they do,” Urias said. “If they’re working, they pay income tax like everybody else. To take that money from them, to take those overpayments that are due to them -- that’s the act of swindlers, not the act of a legitimate state government.”

Urias and the other lawyers are trying to temporarily block the state agency from using its new policy, at least until the case reaches trial this summer. The Mexican American Legal Defense and Educational Fund and the United Workers Center of New Mexico are also representing Sanchez and his fellow plaintiffs. While state law prevents the groups from filing a class action lawsuit against the state, they hope to at least change the state policy.

Demesia Padilla, New Mexico’s taxation and revenue secretary, called the lawsuits “a bogus political charade” when they were filed last year. The lawsuits, she said in a statement, are “asking us to turn a blind eye when illegal immigrants seek tax refunds using tax returns that have fraudulent Social Security numbers. That’s ridiculous.” Her office reiterated that statement this week but did not otherwise respond to questions about the immigrants’ refunds.

States that impose income taxes are about evenly split on how they handle returns from taxpayers who use federal Individual Tax Identification Numbers (ITINs) that do not match the Social Security numbers they use in their jobs, said Verenda Smith, deputy director of the Federation of Tax Administrators. Half process the returns; the others don’t. She said states have been divided ever since the federal government first rolled out the ITINs in 1996.

“It’s a tricky one,” Smith said. “There is harm here. It is a situation where you have a taxpayer who has worked, has overpaid taxes and deserves to get that refund back.” On the other hand, if the worker is using somebody else’s Social Security number illegally, that identity theft harms the rightful owner of the number, Smith added. “There’s no good answer to this one.”

The controversy at the state level mirrors concerns at the federal level, as well. The Treasury Inspector General for Tax Administration has long warned about the potential for fraud in tax returns using ITINs. As a result, the Internal Revenue Service made it far more difficult to obtain an ITIN, and the number of applications for the alternate number dropped by 58 percent between 2011 and 2014.

Tax filers who do use the ITINs have had to wait longer for their returns. Last year, the IRS said the wait for processing the returns could be as long as 11 weeks, as it sorted through a backlog of 120,000 applications. That prompted the National Taxpayer Advocate to warn that the IRS’ attempts to crack down on fraud “do not effectively target the fraud nor do they balance the anti-fraud regime with the taxpayer’s need for a process no more intrusive than necessary, part of a taxpayer’s right to privacy.”

In New Mexico, Urias, the lawyer for the immigrants, said the state’s decision to block immigrants from getting their tax returns put the state squarely at odds with the federal government. The whole point of creating the ITIN was to let people without Social Security numbers file their taxes, he said.

Plus, he warned that holding up or denying refunds to immigrants would discourage them from paying taxes in the first place.

“I will never understand why the Taxation and Revenue Department would want to disincentivize people from paying their taxes. It seems a little backwards for me. That’s exactly what’s going to happen,” he said.

Padilla, the New Mexico revenue secretary, has been at the center of several other dust-ups over unauthorized immigrants. But the previous controversies centered on her agency’s job of issuing driver’s licenses. From 2003 until earlier this year, New Mexico allowed unauthorized to qualify for licenses, despite repeated attempts by Gov. Martinez to get the legislature to reverse the policy.

In 2010, Padilla sent letters to 10,000 license holders who weren’t U.S. citizens. The letters demanded that the license holders come to state offices to prove their identity. Many of the same immigrant rights groups that filed the tax return lawsuits went to court to block Padilla’s driver’s license verification program. Padilla eventually agreed to a settlement that put an end to the program.