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.”

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.

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