BLOG

In 2012, The Treasury Inspector General for Tax Administration (TIGTA) issued an audit report on gross violations and lack of adequate internal controls within the ITIN Division. As per the report, IRS employees filed a complained alleging that the management of the ITIN unit encouraged them to assign ITINs to applicants whose applications were apparently fraudulent. Yes, you got it right! The management of the IRS was interested only in the volume of processed ITIN applications regardless of whether they were fraudulent or not. Moreover, the IRS management relaxed many procedures and eliminated safeguards that were in place to identify fraud patterns and schemes. In short, the IRS "assisted" ITIN tax refund imposters.

So what is the aftermath of the ITIN fraud? The audit report failed to convey the exact number of bogus refunds, but the following numbers will leave you speechless. The IRS processed more than 2.9 million ITIN-based returns, claiming tax refunds of over $6.5 billion in 2011 alone! Out of them, 481,500 ITIN tax returns claimed the Additional Child Tax Credit which resulted in tax refunds of over $4.2 billion. The cherry on top of the cake is the result of the tax return analysis. TIGTA revealed that over 90,000 ITIN applications came from just ten identical addresses, and more than $16 million of tax refunds were deposited to just ten bank accounts. Impressive! As a result, TIGTA recommended changes in the ITIN unit, ranging from rigorous internal controls and employee training to a betterment of taxpayer identity verification processes and revocation of inactive ITINs.

We will stress on the latter two recommendations. Individuals applying for an ITIN were not required to provide original documents to establish their identity and foreign status. Instead, the IRS used to accept copies of identification documents notarized by a U.S. public notary or legalized with an apostille. However, notarized and legalized copies proved to be a serious problem as the IRS was not able to keep pace with the changing laws and regulations of notary practices in each state or country. For example, the IRS is not notified when a public notary is not practicing, or his license is being suspended in a particular state. Further, as per state law, the notary is only required to ensure the person who appeared before him is the one who signed the document but bears no responsibility towards the validity of the documents presented.

The inherent pitfalls of the information exchange between the jurisdictions called for a change in the acceptance of notarized and legalized identification documents. Currently, only military spouses filing a joint tax return and nonresident aliens claiming tax treaty benefits under one of the exceptions are eligible to provide notarized or apostilled identification documents. All other taxpayers, regardless of their immigration status, must present either original documents or copies certified by the issuing agency or the custodian of the record. For instance, if a birth certificate is required to prove identity and eligibility for an ITIN, one should either send the original birth certificate to the IRS or a copy of the birth certificate stamped and certified by the birth registry or agency that issued the certificate in the first place. Same rules apply to all other identification documents, such as passport, driver's license, ID card, and so on.

The most significant modification affects "inactive" tax numbers. The audit report stressed that only 21% of the ITINs issued back in 1996 were used on a 2010 income tax return. Based on the findings, TIGTA recommended a revocation of inactive ITINs. In December 2015, the Congress passed the Protecting Americans from the Tax Hikes Act (PATH Act) Pub. L. 114-113 to accommodate the recommendation. Under the PATH Act, any ITIN that is not used on a federal tax return for three consecutive tax years will expire on December 31 of the third consecutive tax year of nonuse. For example, assume that an individual applied and received an ITIN in 2016. If the person does not file or is not claimed as a dependent on a tax return in 2017, 2018, and 2019, the ITIN will expire on December 31, 2019. This rule applies to all ITINs regardless of the date the ITIN was issued.

ITINs that have expired due to non-use in the last three consecutive years may be renewed anytime starting October 1, 2016, by filing Form W-7 (Rev. 9-2016). The new revised Form W-7 contains a check box that says "renewal." The renewal application could be lodged as a stand-alone Form W-7 or together with a tax return. Still, applicants will be required to attach identification documents that follow the new rules described above. Once the renewal application is approved, the IRS will send a notification letter, and the taxpayer may continue to use the same number. From this point onwards, the ITIN will remain in effect unless it is not used on a tax return for next three consecutive years.

Different rules apply to ITINs issued before January 1, 2013, even if they are currently in use. Under the PATH Act, these ITINs are set to expire on a multi-year schedule based on the date that the ITIN was issued. However, the IRS is concerned that many ITIN holders may not know the date the ITIN was issued or may not keep records about the ITIN. To simplify the renewal process, the IRS decided to implement a renewal schedule based upon the fourth and fifth digits of the ITIN, starting with the ITINs first issued in 1996. For example, the first ITINs assigned in 1996 had middle digits of 78. As per IRS Notice 2016-48, the ITINs that contain the middle digits of 78 or 79 will be relinquished after January 1, 2017.

Beginning in September 2016, the IRS will send a Letter 5821 to individuals holding ITINs with the middle digits of 78 or 79 if the ITIN was used for a taxpayer or a dependent on a U.S. income tax return in any of the last three consecutive tax years. If the ITIN was not used on any income tax return in the last three years, taxpayers must follow the renewal provisions explained above should they need to renew the ITIN.

The Letter 5821 will be sent to the address used on the most recent income tax return on which the ITIN appears or the most recently updated address for the taxpayer on record with the IRS. Starting October 2016, an individual who has received Letter 5821 may submit Form W-7 (Rev. 09-2016) and all required documentation to renew the ITIN. To expedite processing, taxpayers should include a copy of Letter 5821. Once Form W-7 renewal application is approved, the ITIN will again be valid, and the person can continue to use the same number. The IRS will provide information about the expiration schedule and renewal process for the remaining ITINs issued before 2013 in future guidance. The expiration and renewal process for the remaining ITINs is expected to span over multiple years.

In conclusion, we would like to remind taxpayers that the ITIN is a tax number that is issued to assist taxpayers to comply with the U.S. tax laws, to provide adequate means of identification, and to account for tax returns and refunds. The ITIN is not intended to serve any other purpose outside the tax system, including but not limited to seeking employment in the USA, changing immigration status, or as a substitute for a Social Security Number.