The federal agency that strikes fear into many U.S. taxpayers is getting a dose of its own medicine – as it is now the focus of a year-long audit for allowing illegal aliens to scam the system and bilk taxpayers out of billions of dollars every year.

Federal employees are blowing the whistle on the Internal Revenue Service, according to a report by Indianapolis television station WTHR-TV.

The scam involves the use of an Individual Taxpayer Identification Number, or ITIN –a nine-digit tax-processing number assigned by the IRS to individuals who are obligated to file a federal tax return but do not have or are not eligible for a Social Security Number. Illegal aliens may obtain an ITIN by sending the IRS documents such as original or notarized photocopies of birth certificates, driving records, voter ID cards, school records and vaccination records – all documents that are easily forged or falsely notarized.

The Center for Immigration Studies reports that in the 2010 tax year alone, more than 3 million returns were filed with ITINs. Approximately 2.3 million paid no federal income taxes and also collected a cumulative $4 billion in tax refunds.

According to the news station, which conducted a four-month investigation, "the ITIN system is plagued by abuse and fraud."

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Howard Antelis, a tax examiner at the IRS' ITIN processing center in Austin, Texas, explained: "We were being told by upper management to ignore fraud, to assign ITIN numbers and ... pay out refunds to people who are lying. It's a license to steal when you allow that."

A half dozen tax examiners from the Austin office blew the whistle on the IRS and told WTHR-TV the same story: Every one of them says IRS managers told them to "look the other way" when they processed ITIN applications that appeared to be fraudulent or raised suspicion of criminal activity.

As one example, Antelis explained that he had been given a stack of ITIN applications indicating that dozens of dependent children had been attending a South Carolina school.

But he discovered one major problem: The school didn't exist.

Antelis said he told his managers about the false information, but they told him to approve the applications anyway.

"C'mon. This is fraud! Those kids weren't even real and I'm supposed to give out [ITIN] numbers?," Howard said he asked his bosses.

He told the news station, "We're tax examiners but the truth is we're not supposed to look into anything. We're not supposed to examine anything. It's like an assembly line. It's just 'Get it out of here. Boom. Boom. Boom. Get it out of here and don't worry about the fraud. Fraud slows us down.'"

Antelis said he reported the scams regularly to his managers – for years – with no result.

Frustrated with the inaction, he called the Inspector General's office in Washington, D.C.

"I've been working for the federal government for 23 years and I signed an ethical standard of conduct when I went to work that says if you see fraud, you need to report it," he said. "I tried and tried and tried, couldn't get anywhere so … I went into a quiet room and started making phone calls."

According to the report, the IG's office sent auditors to Texas to interview Howard and dozens of other tax examiners.

The auditors made a shocking discovery: IRS employees were, in fact, encouraged to overlook indications of fraud.

The IG's final audit report is expected to be released this summer.

WND reported in May when one Northern California Internal Revenue Service employee described revelations that millions of illegal aliens are claiming and receiving billions of dollars in tax refunds for alleged family members in Mexico using a loophole in the tax code.

Then, a WTHR-TV report documented illegal aliens filing the IRS Additional Child Tax Credit form for children – often nieces and nephews – who have never lived in the United States. To legally qualify, a child must be present in the filer's U.S. residence for over half the year.

"We've seen sometimes 10 or 12 dependents, most times nieces and nephews, on these tax forms," a tax preparer-turned-whistleblower told WTHR News. "The more you put on there, the more you get back."

"Here's a return right here: we've got a $10,300 refund for nine nieces and nephews."

"We're getting an $11,000 refund on this tax return. There's seven nieces and nephews," he said, pointing to another set of documents. "I can bring out stacks and stacks. It's just so easy it's ridiculous."

Of course, the problem was not a revelation to the Northern California IRS field-office worker who viewed the report: "The fraud has been going on for years," he told WND. "Business as usual."

"As the video indicates the Service does nothing," he said, asking WND not use his name to avoid reprisal.

As a result, illegal aliens who are defrauding the system not only manage to pay no federal income taxes, their abuse of the credit means they get back everything they paid into Social Security and more.

On May 23, 2011, dozens of House Republicans co-sponsored H.R. 1956 "to amend the Internal Revenue Code of 1986 to require individuals to provide their Social Security number in order to claim the refundable portion of the child tax credit."

But Democrats resisted, and the legislation stalled after only one hearing before the House Ways and Means Committee.

Ironically, IRS Commissioner Douglas Shulman said in April that paying taxes should be considered one of the pathways to citizenship for illegal aliens.

Based on what comes across the Northern California field-office agent's desk, he has seen the problem burgeon in tax returns filed by Spanish-language tax preparers. Calling them "the enablers and catalyst of this fraud," he noted their clients are more comfortable working with preparers who speak their language. The preparers educate their clients about greater returns they can receive the following year if they qualify family members for the Additional Child Tax Credit refund. It's a win-win-lose – the client learns how to get more money back from the IRS, the preparer generates good will and repeat business, and the U.S. taxpayers get soaked. Knowledge of the scam then spreads by word of mouth.

While agreeing the Additional Child Tax Credit was a major problem, he said it should not be the primary focus.

"When reviewing the big picture of this fraud, always remember and never forget that it is the ITIN that opens the portal to obtaining the credit," he said.

The requirements for obtaining the ITIN for a worker includes submitting original official documentation from the country of origin to the IRS processing center in Austin, Texas, for validation.

But, as WTHR-TV reports, the Texas office has many of its own mismanagement issues, providing more cause for concern.

"It's pure negligence by management and they've been trying to keep it quiet," Antelis said. "There is a criminal element that is defrauding the U.S. government by filing mountains and mountains of these fraudulent applications. We see them in piles in bulk every day that are obviously not legitimate documents and not legitimate tax returns and not legitimate wages … and [IRS managers] don't want to deal with it. That's where all the fraud is. The fraud is in the fake notary stamps and fake documents which we've been accepting."

IRS Deputy Commissioner for Services and Enforcement Steve Miller reportedly met with 100 tax examiners and said he would address the issues reported by workers and the news station.

According to the report, tax examiners will be given additional training and tools to help spot fraudulent paperwork, including ultraviolet lights and magnifying glasses. According to new procedures, illegal aliens will be required to submit original, certified documents – not notarized copies, which are often forged.

"That's a huge step in the right direction," Antelis told the station. "Because of the Inspector General and all of the media attention, things are finally starting to change. For the first time in a long time, I feel like this might get fixed."

But Antelis said the IRS is retaliating against him for exposing the fraud.

The agency reportedly cut his job-performance rating from "exceeds fully successful" to "minimally successful," reducing the size of his paycheck and causing him to wonder whether he will lose his job for speaking out.

"I'm a little nervous, but not really. I guess they could try to fire me, but I don't think they will," he said. "I just want to see things fixed. We've been allowing the U.S. taxpayer to get robbed for years now and those days appear to be over."