ITINs - exceptions and questions.

In December 2003, the IRS implemented significant changes to its individual tax identification number (ITIN) program; see Olmstead, Tax Practice & Procedures, "ITIN Application Changes," TTA, April 2004, p. 244, and Laffie, News Notes, "ITIN Program Revisions," TTA, February 2004, p. 69.

Reasons for Change

According to IRS Commissioner Mark Everson, about 25% of the 7 million ITINs issued since 1996 have never actually appeared on a tax return. Further, a General Accounting Office (GAO) study (GAO-04-529T), "Individual Taxpayers Identification Numbers Can Be Improperly Obtained and Used" (3/10/04), concluded that the IRS remains limited in its ability to verify applicants' identifies. The report provides an example of GAO staff obtaining an ITIN, prior to December 2003, by submitting bogus documents through the mail and using the number to open a bank account and obtain an ATM card. At a March 11, 2004, hearing before the House Oversight Subcommittee, written testimony by the Treasury Inspector General for Tax Administration reported that ITIN issuance is rising sharply, with a 36% increase between 2001 and 2002: it suggested that the current problems surrounding ITINs are likely to get worse.

Exceptions to ITIN Procedures

In general, taxpayers requesting an ITIN expressly to comply with income tax filing obligations must file a completed Federal return with Form W-7, Application for IRS Individual Taxpayer Identification Number. However, this requirement has four exceptions.

Exception 1: Passive income--treaty benefits or third-party withholding. To obtain an ITIN under this exception, a taxpayer must include documentation with the Form W-7 showing ownership of the asset that generates income subject to information reporting or withholding requirements. For example, a holder of financial accounts would provide evidence of opening an account and having an ownership interest in the account.

Exception 2: Other income (wages, salary and compensation)--treaty benefits or foreign student receiving scholarship or fellowship.

Exception 3: Third party reporting--mortgage interest. To obtain an ITIN under this exception, a taxpayer must include documentation with Form W-7, showing evidence of a home mortgage loan, such as a loan commitment letter or a broker's listing agreement.

Exception 4: Disposition by foreign person of U.S. real property interest. An ITIN may be required by foreign persons, to apply for a withholding certificate to reduce or eliminate withholding on a disposition of U.S. real property. An ITIN is obtained in this case by including a completed Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, and a copy of the sales contract, with Form W-7.

Taxpayers can obtain more information about ITINs in IRS Pub. 1915, Understanding your IRS Individual Taxpayer Identification Number ITIN, issued Feb. 27, 2004.

ITIN Comment Period

The IRS accepted ITIN comments through June 15, 2004 and was particularly interested in comments on the following:

1. How can Form W-7 and its instructions be simplified or clarified?

2. Should the four exceptions (discussed above) to the requirement of attaching a completed return to Form W-7 be modified? Are additional exceptions needed?

3. What steps, if any, should the Service consider to improve the acceptance agent program, under which ITIN applicants may submit a Form W-7 with supporting documentation, to an acceptance agent for review and submission to the Service?

Additional Questions

In the author's experience, the IRS also needs to address the following questions:

* Specifically, what effect will the revised Federal ITIN procedures have on state tax administration?

* What recourse do taxpayers have if an ITIN application is denied, but a tax return has been submitted with the application?

* What procedures are in place to revoke existing and newly issued ITINs that do not appear on returns in subsequent years?

* In nearly all cases of undocumented workers, the ITIN filers' supporting income documents (Forms W-2) will include the Social Security number (SSN) of another taxpayer. What protections do the new procedures offer the innocent taxpayer who is subject to the improper use of his or her SSN (i.e., identity theft)?

* How is the IRS ensuring that returns prepared with an ITIN/SSN mismatch are paper flied and not e-filed? Because ITIN filers are not eligible for the earned income tax credit (EITC), adequate processing procedures need to be in place to curb any current or potential EITC abuses.

* Is there liability for employers of ITIN filers?

* How will the IRS evaluate whether the new ITIN program is working?

The ITIN program is certainly in a state of transition as the IRS tries to balance tax administration goals, taxpayer privacy rights and homeland security issues. The ITIN program is likely to undergo additional changes after the IRS evaluates the public comments on the new procedures.

CHRISTINE C. BAUMAN, PH.D., CPA, DIRECTOR OF THE LOW INCOME TAXPAYER CLINIC, UNIVERSITY OF WISCONSIN-MILWAUKEE, MILWAUKEE, WI