Your client has a valid deduction that he is not using, so I'm not sure if I would be comfortable with signing that return because the perjury statement says that to the best of your knowledge the return is "true, correct, and complete".  I could be wrong, but intentionally omitting a valid deduction doesn't seem to be a "complete" tax return.

In prior years, I would have definitely told the client they are an idiot and to take the deduction.  With all of the stuff that has been happening this year in regards to undocumented aliens ... I'm not sure how I would respond to the client.

When all else fails, read the Internal Revenue Code.

"Section 162(c)(2)Other illegal payments

No deduction shall be allowed under subsection (a) for any payment (other than a payment described in paragraph (1)) made, directly or indirectly, to any person, if the payment constitutes an illegal bribe, illegal kickback, or other illegal payment under any law of the United States, or under any law of a State (but only if such State law is generally enforced), which subjects the payor to a criminal penalty or the loss of license or privilege to engage in a trade or business."

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@BobKamman wrote:

which subjects the payor to a criminal penalty

Unless there is a pattern of hiring undocumented workers, there is no criminal penalty, which means it is still deductible.

Are you saying that the payment to the undocumented worker is illegal?

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@strongsilence wrote:

Are you saying that the payment to the undocumented worker is illegal?

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For "employment", yes.   But as my prior comment made, unless there is a pattern of it, it is still deductible for income tax purposes.

https://www.law.cornell.edu/uscode/text/8/1324a

I am not certain of this, at first glance, the definition of "employment" in that law section might not include contractors.  

Thanks.

Because he didn't 1099 the worker, he would lose the deduction if audited.

And his defense is that he earnestly and reasonably believed the worker gave him a tax identification number.

The law has criminal penalties for "pattern OR practice."  What you are saying might apply to "pattern."  It's unclear, given the current attitude about enforcement, what "practice" means.  If you pay the same person $100 a week, for 40 weeks, is that a pattern, or a practice?  Especially, if you do it knowingly?  

Thank you.  There might be a pattern since he has hired one undocumented worker in each of the last two years.  My area of the country has seen ICE activity so he might be subject to enforcement. I think he should talk to an attorney.  

The Department of Justice has stated in its Immigration-Related Unfair Employment Practices guidance that “[a] person who uses a contract, subcontract, or exchange to obtain the labor of an alien knowing that the alien is unauthorized… shall be considered to have hired the alien for employment in violation of the Act.” (8 U.S.C. §1324a(a)(4); see also 8 C.F.R. §274a.5).

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@strongsilence wrote:

Because he didn't 1099 the worker, he would lose the deduction if audited.

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Not issuing a 1099 would not lose the deduction.  It would just subject him to the penalty for not timely filing a 1099 (or problems for misclassifying an employee).

@TaxGuyBill   The “pattern or practice” language you like is in Title 8, Section 1324a, and there are regulations that exclude household help from its application.  However, there is also Section 1324, which makes it a felony to encourage someone to continue to reside in the US illegally. That section was (somewhat famously) used in 2012 to prosecute a Homeland Security employee who hired an undocumented worker to clean her Boston condo every couple weeks for $80. District Court Judge Woodlock in that case (you can look it up, the defendant was Lorraine Henderson), granting a new trial because subsequent case law had shown errors in his jury instructions, wrote:

“The government has in § 1324(a)(1)(A)(iv) a tool by which to prosecute anyone who knowingly employs an illegal alien for intermittent domestic work, even if that alien is engaged in employment by terms exempt from sanction under immigration law. Indeed, the government professes the statute is broad enough to permit prosecutions of housewives for employing undocumented aliens . . ."

The government appealed, but then decided to dismiss the case rather than retry it.

Thanks.

"he earnestly and reasonably believed the worker gave him a tax identification number."

So how did find out it wasn't if he didn't issue a W-2 or 1099 and receive a notice from IRS or SSA?