The Tax Reform Act of 1986 contained a litte-noticed provision authorizing the Internal Revenue Service to require people filing federal income tax returns to list the Social Security number of anyone they claimed as a dependent.
The results have been astonishing.An IRS study now shows that on 1987 returns - the first to be affected by the new rule - taxpayers claimed 7 million fewer dependents than had been projected. Because the government didn't have to allow tax exemptions for those 7 million people, it collected an extra $2.8 billion in income taxes for 1987 alone.
The IRS made a massive computer study to answer the question: Where have all the dependents gone? The answer is that they never existed. The evidence is that for years taxpayers have been massively defrauding the government by claiming deductions for phantom dependents - mostly children, parents or other close relatives.
The IRS study identified 11,627 taxpayers who listed at least seven fewer children for 1987 than they did the previous year. So far, 90 percent of these cases have been closed with an average tax increase of $2,200. About four percent have been referred for possible criminal prosecution.
"These results provide justification for assuming that the dependents that disappeared should not have been claimed on those returns in the first place," says John A. Szilagyi of the IRS research division.
He adds, "The decrease (in number of claimed dependents) is particularly significant because it seems to indicate that a 20-year trend of increasing numbers of improper dependency exemptions has finally been reversed."
The IRS will keep the pressure on, matching the Social Security numbers of claimed dependents to eliminate duplications and assure that anyone listed as a dependent does not file his own tax return and claim a personal exemption for himself, which is not allowed. An IRS sampling of 1988 returns indicates that about 1.5 million claimed dependents were duplicate. Many of these resulted from both the father and mother of a divorced or separated couple claiming they support the same child.
On tax returns for the 1990 tax year, to be filed next spring, the taxpayer may exempt from taxation $2,050 of income, up from $2,000 last year, for each dependent. For the 1991 tax year, the exemption increases to $2,150 because of an adjustment for inflation.
The original requirement for listing Social Security numbers of dependents applied to all dependents age 5 or more in the 1987 and 1988 tax years, meaning children that young had to obtain numbers. For the 1989 and 1990 tax years, the regulation applies to all dependents age 2 or older by the end of the tax year. Next year, infants who reach their first birthday by the end of the year will have to have their own Social Security numbers.
The Social Security Administration now promotes a voluntary program that allows parents to request a number for a newborn infant before they leave the hospital. The parents need only check a box on the birth record form. Social Security will automatically set up an account for the child and mail a Social Security card that carries a number that will follow the child for the rest of its life.