New Procedures for ITINs Complicate Compliance with U.S. Tax Obligations

Original Documentation or Certified Copies from the Issuing Agency Are Required

The IRS announced interim changes to its procedures for issuing new individual taxpayer identification numbers (ITINs). This IRS announcement, which includes more stringent requirements, was made on June 22, 2012.

ITINs are nine-digit numbers issued for tax-administration purposes to non-U.S. persons who do not have and are not eligible to obtain a Social Security number. Treasury regulations require foreign individuals to obtain and furnish an ITIN in the following circumstances:

• a foreign person that has income effectively connected with the conduct of a U.S. trade or business at any time during the taxable year; this category includes most individuals who are performing services in the United States (for example, a non-U.S. business executive serving on the board of directors of a U.S. company and a foreign employee on temporary assignment in the U.S.)

• a foreign person that has a U.S. office or place of business or a U.S. fiscal or paying agent at any time during the taxable year

• a non-resident alien that makes an election to be treated as a resident alien for purposes of filing joint tax returns with a U.S. citizen or resident spouse

• a foreign person that files a tax return, an amended return, or a refund claim (subject to certain exceptions for persons filing information returns and certain other documents not considered to be tax returns)

• a foreign person who furnishes a withholding certificate on Form W-8 or Form 8233 (subject to certain exceptions)

• a foreign person who is required to provide an ITIN under the Foreign Investment in Real Property Act, which relates to taxation and withholding on sales of U.S. real property interests by non-U.S. personsa foreign partner who must furnish the partnership with a certification of its status for purposes of withholding under Section 1446

Under the new procedure, the IRS will only issue ITINs when the application on Form W-7 includes original documentation, such as passports and birth certificates, or certified copies of these documents from the issuing agency. The IRS stated that it will discontinue its current practice of accepting notarized copies of those documents.

The IRS provided certain exceptions from these new rules for some categories of applicants, such as spouses and dependents of U.S. military personnel and nonresident aliens applying for ITINs for the purpose of claiming tax treaty benefits. However, the IRS provided that scrutiny of the documents for these applicants will be heightened.

On October 2, 2012, the IRS announced two additional exceptions from the new ITIN requirements for individuals studying in the U.S. under the Student Exchange Visitors Program and for taxpayers who have an approved extension to file 2011 tax returns.

New Procedures Burden Compliance with U.S. Tax Obligations

These procedural changes create a significant procedural burden to U.S. tax compliance by many nonresident individuals. Many foreign individuals who are required to obtain ITINs may chose not to do so because they are either unable or unwilling to send original documents to the IRS and because most foreign issuing agencies do not release certified copies of documents.

Foreign individuals may reasonably fear that the original documents may be lost by the delivery service or by the IRS. Replacing lost documents may be costly, difficult, and in some cases, impossible. In fact, the IRS acknowledges the risk of loss and provides in the instructions to Form W-7 that "To avoid any loss of your documents, it is suggested you do not submit the original documentation."

For many foreign individuals it may not be feasible or practical to part with the original documents because they may need the originals for other purposes. The IRS states in the instructions to Form W-7 that it typically issues ITINs within six to 10 weeks, but it undertakes to return the original documents within 60 days. Many people cannot be without these documents for 60 days because they need their original documents for identification or for travel.

Non-resident aliens are required to have proof of their legal status in the U.S., which usually comes in the form of a U.S. visa attached to their passport. Sending the original passport with the visa to the IRS may leave the non-resident alien without proof of legal status in the U.S., which could be especially problematic in states where the police may be authorized to detain people who cannot prove their legal status under the so-called "show me your papers" laws.

Additionally, for individuals who are performing temporary services in the U.S., such as athletes, artists, or public speakers, the IRS requires a letter from the Social Security Administration stating that the person is not eligible for a Social Security number. This letter can be obtained only by personally visiting a Social Security Administration office or a U.S. embassy or consulate which accepts applications for Social Security numbers. This requirement creates an additional burden to obtaining an ITIN because the foreign individual may not have time to visit a Social Security Administration office in the U.S. and may not live near a U.S. embassy or consulate.

The new procedures for obtaining an ITIN create significant obstacles for foreign individuals who attempt to comply with their U.S. tax filing and compliance obligations, which are particularly burdensome for foreign individuals who are in the United States on a temporary basis. Instead of asking for original documents, the IRS should consider other less burdensome means to verify the information submitted on Form W-7. The IRS has promised to issue final rules before the start of the 2013 tax filing season and it is hoped that the final rules will provide a practical alternative to the surrender of original documents.

*This article has been republished with permission from Tax Notes International. Click here to access the publication.