IRS 1040 citizenship question could discourage tax filing

• Key insight: Learn why the IRS plans to add a citizenship question to Form 1040.
• What’s at stake: Lawful immigrants and U.S. citizen children who face losing refundable federal tax credits.
• Expert quote: “…being an immigrant is becoming more onerous.” — Manish Daftari, Vialto Partners

The Internal Revenue Service’s plan to include a question on the Form 1040 next year asking about a taxpayer’s citizenship status is already drawing fire from critics who fear it could deter millions of taxpayers from filing their returns and paying their taxes.

Processing Content

A draft version of the form asks, “At the time you file your return, are you, and your spouse if filing jointly, a U.S. citizen, U.S. national, or an alien lawfully authorized to work in the U.S.?” Another new line states, “If treating a nonresident alien or dual-status alien spouse as a U.S. resident for the entire tax year, check the box and enter their name (attach statement if required).”

The IRS has also drafted a new Schedule 3-A, Federal Public Benefit, that asks, “Are you or your spouse a U.S. citizen, U.S. national, or qualified alien?” when calculating the refundable portion of various refundable tax credits, which then feeds into the Form 1040.

The question has already provoked pushback, with a group of Senate Democrats calling on IRS CEO Frank Bisignano to drop the citizenship question from the draft form. The move comes as the IRS has separately drawn up a plan to deny refundable federal tax credits such as the Earned Income Tax Credit, Adoption Tax Credit, American Opportunity Tax Credit and Child Tax Credit to lawful immigrants and their children who are U.S. citizens. The One Big Beautiful Bill Act that Congress passed last year has already limited a number of tax credits and deductions for non-citizens without Social Security numbers.

“There are a number of credits that are only available to U.S. citizens, especially some refundable credits,” said Julie Baron, a global mobility partner at Vialto Partners, a provider of cross-border tax and immigration services. “What they’re trying to do is minimize the fraud that comes with some of those credits that people have been claiming, and who aren’t entitled to unless they’re citizens.”

Many tax credits relate to whether taxpayers and their dependents have Social Security numbers, not just the Individual Taxpayer Identification Numbers typically given to foreign nationals and resident and nonresident aliens. 

“Usually only people who are citizens or Green Card holders can get their dependents Social Security numbers,” said Baron. “Those Social Security numbers drive whether they’re eligible for some of the Child Tax Credits. It doesn’t necessarily require citizenship, but generally, you can only get a Social Security number if your children are citizens or Green Card holders. From a tax perspective, this question could flush out some of the people that are claiming those credits where they aren’t necessarily eligible for the credits.”

The IRS has not yet released the instructions for the draft Form 1040 or the new Schedule 3-A with information on how to answer those questions as of this writing. However, the prospect of having to answer sensitive questions about immigration and citizenship status could deter many undocumented taxpayers from filing their taxes, especially now that the IRS has been sharing information with Immigration and Customs Enforcement under the Trump administration, although a federal appeals court has blocked such information sharing for now.

“If you’re a citizen or a Green Card holder, it’s probably not much of a concern and you’re going to answer the question,” said Manish Daftari, a partner at Vialto Partners. “The biggest concern is probably for illegal immigrants. We know illegal immigrants can and do file tax returns, and there is a fear that the information that is put in the form will be shared with immigration officials such as ICE.”

Chilling effect

The IRS reportedly provided the addresses of nearly 47,000 people to Immigration and Customs Enforcement.

“Because of that incident, there is a general fear that if you don’t have proper work authorization and you say ‘No,’ will that information be shared with immigration officials? And will that be a means for a worst-case scenario of being arrested and put into deportation proceedings?” Daftari said. “It could have a chilling effect on illegal immigrants filing their taxes. For individuals who do have visas and work authorization, there’s not really much risk there for answering the question, but in the totality of everything that’s happening in immigration … there’s a lot of new policies that are being implemented or proposed that are making immigration harder.”

He noted that the Trump administration has proposed to charge a $100,000 fee for H-1B visas, as well as a new fee rule for student visas. Under the proposed rule from the Department of Homeland Security, employers would be charged an initial $70,000 per nonimmigrant student for Optional Practical Training and $30,000 for any additional training. 

“All of it together is creating pressure, and being an immigrant is becoming more onerous,” said Daftari.

Foreign business travel

The new requirements could even deter foreign business travelers from visiting the U.S.

“The population that we help our clients with is business travelers, and sometimes there’s some gray area with business travelers who come to the United States, maybe on a visa waiver program or some kind of visa where they’re allowed to attend meetings,” said Baron. “They’re allowed to do some work in the U.S., but not necessarily be employed in the U.S. It may discourage people who are in the U.S. legally to attend meetings and those kinds of things.”

It’s unclear whether the IRS will clarify the question on the draft version of the Form 1040 or on the instructions. As it is currently worded, it asks if “at the time that you file” are you legally authorized to work in the U.S., potentially leading to complicated discrepancies.

“From our clients’ perspective, I’m a bit worried about some of the short-term business travelers that we see that are doing the right thing and filing their tax returns as they should be for the workdays that they have in the U.S.,” Collins said. “But the way the question is worded could cause them some anxiety over how they should answer that appropriately.”

Using newer technology

The IRS could decide to remove the question, depending on the pushback it receives on the draft form.

“We’ll see what happens,” Collins said. “Depending on what’s happening in politics, different things go on the tax return. There has been a lot of talk in Congress about trying to simplify the U.S. [tax system] trying to make it more efficient, trying to make it more technologically focused because the IRS has such old systems and computers, and they’re a bit antiquated in the way they operate. We’re still sending faxes to the IRS, believe it or not. The focus may shift to less asking questions on a tax return, and maybe some more technology that’ll help them determine who’s eligible for what credits and who isn’t.”

Recent bills in Congress aim to do just that: Make the IRS more efficient. The Senate recently voted by unanimous consent to pass the Taxpayer Assistance and Service Act, a wide-ranging bipartisan package of reforms to IRS administration requiring a number of technology upgrades, but the legislation has not yet been taken up in the House.

The IRS is also starting to lean more on using artificial intelligence to make up for the cuts in staffing and budget in recent years, but that could cause new problems. 

“What happens if you’re overly reliant on AI?” said James Creech, a principal in Baker Tilly’s specialty tax practice. “How does that impact your learning, both in the private practice and on the AI side for the IRS. One of my concerns for the next near term — say 18, 24 or 36 months — is that the more the IRS leans into AI for audit selection, the more it’s going to get pushed down to auditors that are just going to assume because AI found something, they have to write an adjustment. They’re going to really abdicate their responsibility as human beings to try and get to the correct tax result, which is what they should be doing.”

IRS tax examiners may feel pressured if the AI flags a return because it looks like someone who might be ineligible is claiming a tax credit.

“A return that’s AI selected is going to land on the bot on their desk,” said Creech. “AI is going to say something like ‘Look at the Schedule C expenses here,’ and because it’s AI — because it’s a black box, because it’s supposed to be ‘smart’ — they’re just going to make adjustments because that’s going to become the path of least resistance: ‘The computer told me to make adjustments. I just made adjustments and I’m trying not to get in trouble at work.’ I think that it’s going to be particularly a problem with younger people or greener agents that just won’t have that confidence or experience to really try and understand what taxpayers are doing.”

AI is a big leap from some old computer systems at the IRS that, in some cases date, back to the Kennedy administration.

“We’re still sending faxes, and we’re going to go to using AI,” said Baron. “We’ve jumped a couple decades.”

There are still unanswered questions about whether the citizenship information will be requested next tax season on the final version of the 1040, and in the years after the current administration leaves office, as well as how that information will be used 

“Traditionally, information wasn’t shared between governments,” said Daftari. “There’s walls in place. There’s some regulation around confidentiality of information. So if that is starting to be freely exchanged, that’s where the anxiety is for a lot of people going through the immigration process, and that question hasn’t been answered.”

Introductory bullet points created by AI with editorial review.