Today we welcome guest bloggers Lany Villalobos and Patrick Thomas. Lany and Patrick are Christine Brunswick Public Service Fellows of the Tax Section of the ABA. Lany works with Philadelphia Legal Assistance where she is part of the Pennsylvania Farm Project Low Income Taxpayer Clinic and Patrick worksat the Neighborhood Christian Legal Clinic in Indianapolis, Indiana. The issue they write on has received much attention recently as Congress and the IRS try to find the right balance between promoting compliance and preventing fraud. Their post suggest we may not have found the sweet spot yet as we try to solve that problem. Keith
In her most recent 2015 Annual Report to Congress, the National Taxpayer Advocate (NTA) identified as Most Serious Problem #18 the IRS processes that create barriers to filing returns and paying taxes for taxpayers applying for Individual Taxpayer Identification Numbers (ITINs). In this post, we will summarize the IRS processes causing barriers to ITIN applicants as identified by the NTA and discuss added concerns in light of the recent ITIN changes in the Protecting Americans from Tax Hikes (PATH) Act, which was signed into law on December 18, 2015.read more...
Barriers for ITIN Applicants Created by IRS Processes As Identified by the NTA
The NTA raises several concerns about IRS processes that create barriers for ITIN applicants and filers. First, the NTA suggests that ITIN applicants must submit an ITIN application with a paper tax return during the filing season. This accordingly causes hardship in gathering and sending original supporting documentation, an inability to e-file in the first year, significant backlog issues, including almost 120,000 ITIN applications at one point, delayed refunds, and lost returns—not to mention the 11-week processing time frame for ITINs during filing season.
However, ITIN applicants are not required to apply for an ITIN with a paper tax return solely during filing season. As referenced in footnote 35 of the report, the IRS requires that ITIN applicants demonstrate a tax administration purpose for receiving an ITIN; filing a tax return demonstrates such a purpose. ITIN applications with paper tax returns may also be submitted outside of the filing season, but this usually involves a taxpayer filing a late tax return or an ITIN applicant re-filing a previously rejected ITIN application. Yet, because of the requirement to file with a tax return, many first-year filers or filers with recently born dependent children must indeed wait until filing season—and its lengthy processing delays—to apply for an ITIN for the first time.
Second, the NTA identifies the requirement that ITIN applicants must mail in original or certified copies of supporting documentation proving identity and foreign status as imposing a hardship on ITIN applicants, who must go without important original identification documents and risk these documents being lost in the process. To obtain an ITIN, applicants must file an ITIN application (Form W-7) with an original tax return and original or certified copies of supporting documentation. The supporting documentation must be a valid passport or an original birth certificate and one other identification document, such as a consular identification for adults, school records for children under 18 years of age, or medical records for children under six years of age. See the instructions to Form W-7, page 3 for a list of acceptable documentation.
Next the NTA notes interrelated problems with the effective requirement that most ITIN applications be filed during filing season and the requirement to send original supporting documentation: ITIN unit errors due to the large number of applications processed during the filing season; the use of seasonal employees with less expertise in reviewing ITIN applications; an applicant’s limited time frame to properly gather the necessary original documentation required with an ITIN application; and ITIN applicants abroad needing to mail original documentation internationally due to limited options for obtaining certified copies of supporting documentation abroad. These barriers lead to high rejection rates for ITIN applications.
Lastly, the NTA raises concerns about the IRS’s plan to implement the ITIN deactivation provision of the PATH Act, particularly with respect to ITINs used solely on third party returns, and also raises concerns with the lack of notice afforded to taxpayers before the deactivation.
ITIN Specific Provisions Within the PATH ACT
We commend the NTA for addressing the barriers ITIN applicants face as a result of IRS processes, as these processes disproportionately affect immigrant individuals and families in the United States. Figure 1.18.1 in the report shows that in 2014 50% of ITIN applicants were from Mexico and that 98% of ITIN applications were for primary taxpayers, spouses, and dependents. Additionally, Figure 1.18.2 shows that 85% of ITIN applicants filed as residents for tax purposes, meaning that a vast majority of ITIN applicants reside in the United States more than 183 days to meet the substantial presence test.
These barriers to filing tax returns and paying taxes are even more alarming in light of the recent ITIN changes by the PATH Act, which now requires the deactivation of unused ITIN issued after 2012, the deactiviation of ITINs issued prior to 2013, and the denial of retroactive claims to the Child Tax Credit (CTC) for new ITIN filers. This post only addresses Section 203 and Section 205 of the PATH Act, though there are also other provisions affecting immigrant communities, such as the denial of retroactive Earned Income Tax Credit claims for recent Social Security number recipients (Section 204) and denial of retroactive American Opportunity Credit claims for recent ITIN applicants (Section 206).
ITIN Deactivation and Renewals Under the PATH Act
Section 203 of the PATH Act amends IRC § 6109 by adding subsection (i) to the statute. We focus on Section 6109(i)(3)(A)-(B), which addresses the deactivation of ITINs issued after 2012 and the deactivation of ITINs issued before 2013. IRC § 6109(i)(3)(A) will now provide:
An individual taxpayer identification number issued after December 31, 2012, shall remain in effect unless the individual to whom such number is issued does not file a return of tax (or is not included as a dependent on the return of tax of another taxpayer) for 3 consecutive taxable years. In the case of an individual described in the preceding sentence, such number shall expire on the last day of such third consecutive taxable year.
ITINs issued in 2013 and forward will remain active indefinitely so long as the ITIN is used (either by a filer or a dependent on a return) at least once in three consecutive years after its issuance. For example, Taxpayer A is issued an ITIN in May 2013. If Taxpayer A files a tax return for tax years 2013, 2014, and 2015, the ITIN will remain active because it has been used for three consecutive taxable years. Now let’s say Taxpayer A files a tax return for tax year 2013, but does not file a tax return for tax years 2014, 2015, and 2016 because he is below the filing threshold. If Taxpayer A works in tax year 2017 and now is required to file a tax return, Taxpayer A must mail a new ITIN application with an original tax return and original supporting documentation for tax year 2017.
The deactivation process for ITINs issued in 2012 and before will be outlined in IRC § 6109(i)(3)(B):
In the case of an individual with respect to whom an individual taxpayer identification number was issued before January 1, 2013, such number shall remain in effect until the earlier of—
(i) the applicable date, or
(ii) if the individual does not file a return of tax (or is not included as a dependent on the return of tax of another taxpayer) for 3 consecutive taxable years, the earlier of—
(I) the last day of such third consecutive taxable year, or
(II) the last day of the taxable year that includes the date of the enactment of this subsection.
This provision breaks up the ITIN deactivation process for pre-2012 ITINs in two ways: IRC. § 6109(i)(3)(B)(i) concerns ITIN filers who consistently file tax returns with an ITIN for themselves and/or dependents, or at least without a three year consecutive gap; and IRC § 6109(i)(3)(B)(ii) addresses ITIN filers who have not consistently filed a tax return with an ITIN or claimed a dependent with an ITIN at least once in three consecutive tax years.
ITINs issued in 2012 or before to taxpayers who have consistently filed tax returns will deactivate by an “applicable date” based on the year of issuance and will, presumably, need to be renewed. The “applicable date” will be defined in IRC § 6109(i)(3)(C):
|If the ITIN Was Issued:||Then, the ITIN Will Deactivate On:|
|Before January 1, 2008||January 1, 2017|
|In 2008||January 1, 2018|
|In 2009 or 2010||January 1, 2019|
|In 2011 or 2012||January 1, 2020|
Here is an example of the “applicable date.” Taxpayer B was issued an ITIN in April 2007. She has consistently filed a tax return for each tax year since tax year 2007. Her ITIN will deactivate on January 1, 2017. This example illustrates important concerns about the implementation of this provision of the PATH Act: how exactly will the renewal process be carried out? Will there be new W-7 forms? Will taxpayers need to send original supporting documentation again to the IRS ITIN unit? The ITIN deactivation starts this filing season for some ITIN filers, but there is no published guidance by the IRS on the renewal process.
Taxpayer B in our example has two options: renew her ITIN before January 1, 2017 or wait until next year’s filing season in 2017 for tax year 2016 to file a new ITIN application. She is in a bit of a predicament, though. There is currently no guidance on how to renew her ITIN. If she waits until next filing season in 2017, she will need to reapply for a new ITIN with a paper tax return and original supporting documentation because her ITIN will be deactivated by that point.
Let’s take another example for taxpayers with ITINs issued prior to 2013 who have failed to file a tax return using an ITIN and/or failed to claim a dependent with an ITIN for three consecutive taxable years under IRC § 6109(i)(3)(B)(ii). Taxpayer C was issued an ITIN in April 2011. He does not file tax returns for tax years 2012, 2013, and 2014 because he was below the filing threshold. His ITIN already expired on December 31, 2014, “the last day of such third consecutive taxable year” in which the taxpayer did not file. IRC § 6109(i)(3)(B)(I). Taxpayer C must now file a new ITIN application with a papertax return, should he have a filing requirement. This raises additional important questions: will the ITIN issued to Taxpayer C be the same as the prior ITIN? If not, is Taxpayer C authorized to obtain information on his prior tax filings under the prior ITIN? Or, if Taxpayer C does not have a subsequent filing requirement, may he still obtain such information? What if Taxpayer C has a debt under the prior ITIN?
The ITIN deactivation process will likely raise additional barriers in filing returns and paying taxes for ITIN filers. The currently overburdened IRS ITIN unit, which at one point had a backlog of nearly 120,000 ITIN applications, will not only continue to process new ITIN applications for first time filers but must now also begin to renew ITINs and accept applications from ITIN holders whose ITINs have already expired. The lack of guidance on the ITIN renewal process is especially problematic, particularly on the question of whether the IRS will require resubmission of original documentation. ITIN filers need time to request original support documentation from consulates or home countries for themselves and their dependents. And, as we will discuss next, ITIN filers may also be denied the Child Tax Credit in the first year in which the ITIN is requested and perhaps also in the year of renewal or re-activation
The Child Tax Credit and ITINs Under the PATH Act
In Section 205 of the PATH Act, Congress purported to deny retroactive Child Tax Credit claims from ITIN recipients—i.e., an ITIN filer, filing for the first time in 2016, could not claim the CTC for years prior to 2015. Indeed, Congress entitled Section 205 “Prevention of Retroactive Claims of Child Tax Credit” and the Ways and Means Committee summarized Section 205 as “prohibit[ing] an individual from retroactively claiming the [CTC] . . . for any prior year in which the individual or a qualifying child . . . did not have an ITIN.” Given that ITIN filers otherwise lawfully entitled to the CTC could previously claim the credit on untimely tax returns, Section 205 effectively represents an additional failure-to-file penalty for ITIN filers, even if the taxpayer is owed a refund. At best, it is an additional incentive for ITIN recipients to timely file.
Yet Section 205 sweeps much further than advertised. It amends IRC § 24(e) such that, to claim the CTC, an ITIN must be issued—not just applied for—prior to the applicable tax return’s due date. While this does address the concern surrounding prior year returns, it also impacts current-year, timely filed returns: if an ITIN is not issued before April 15 for a first-year ITIN filer, any CTC claim will be disallowed, even for timely filed tax returns. As noted in the Annual Report, ITIN application processing can take 11 weeks during filing season. Thus, unless ITIN applicants file their applications and tax returns by January 30, they have little chance of obtaining the CTC on their timely filed tax returns.
Moreover, given the deactivation process noted above, it is unclear whether Section 205 will similarly complicate CTC claims in the year of renewal. It certainly impacts those expired ITINs for ITIN holders, such as Taxpayer C in the example above, who did not have a filing requirement in the last three years, yet have future valid CTC claims. If Congress’s true concern in Section 205 was to incentivize taxpayers to file timely, it should immediately clarify that a valid application for an ITIN, submitted with a timely filed tax return, qualifies a taxpayer to receive the CTC.
While legitimate concerns exist regarding the integrity of the ITIN program—especially regarding fraudulent claims to the Additional Child Tax Credit—Congress’s steps to address the problem in the PATH Act needlessly hamper the ability of tax-compliant ITIN holders to file tax returns, claim legitimate tax credits, and remain in compliance. First, Congress should clarify that first-time ITIN filers who timely file a tax return are able to claim the Child Tax Credit. Next, the IRS must work quickly to publish guidance related to ITIN renewals that must occur in 2016, keeping in mind that many taxpayers’ ITINs will deactivate on January 1, 2017. The IRS must also publicize the requirement to renew such ITINs, such that ITIN holders are not shocked that their ITINs are inactive in the 2017 filing season. Finally, the IRS should not require the resubmission of original supporting documentation with a renewal ITIN application, as the IRS has previously verified the identity and foreign status of the ITIN filer at the time of the filing of the original ITIN application.