Trials and Tribulations in the ITIN Unit

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We welcome first time guest blogger Sarah Lora. Sarah is a supervising attorney in Legal Aid Services of Oregon located in Portland, Oregon. She is also a vice chair of the ABA Tax Section Pro Bono and Low Income Taxpayer Committee. She represents a high percentage of immigrant taxpayers. Today, she discusses the problems encountered by one of her clients trying to file a proper tax return. The process led to frustration and points to the need for a system that allows clients to have a further hearing when things go wrong. She cites us to the Taxpayer Bill of Rights and to administrative law in her discussion of the search for a clear answer. Julie Preciado, Willamette Law School 2L, helped edit this piece. Keith

Our clinic represents a U.S. legal permanent resident who supports his teenage daughter who resides in Mexico. Our clinic helped the client file his 2015 return tax return. The client rightfully included his daughter as a dependent on the return. The daughter qualifies as a dependent under Section 151 of the code, except that she does not have a TIN as required by Section 151(e). To satisfy that requirement, we helped prepare the W-7 application pursuant to Section 6109(i)(1) with supporting documents of an original birth certificate and school record as allowed by the W-7 instructions. A few weeks passed and we received a notice that stated that the supporting documents submitted were insufficient, without further explanation.

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Regarding school records, the W-7 instructions state:

School records will be accepted only if they are for a school term ending no more than 12 months from the date of the Form W-7 application. The school record must consist of an official report card or transcript issued by the school or the equivalent of a Ministry of Education. The school record must also be signed by a school official or ministry official. The record must be dated and contain the student’s name, coursework with grades (unless under age 6), date of grading period(s) (unless under age 6), and school name and address.

I carefully reviewed the documents and the W-7 instructions and could find no problem with the birth certificate. The only discrepancy I could find with the school record is that it contained a grade point average, and not individual coursework. We submitted a detailed explanation as to why the documents substantially complied with the W-7 instructions. The rejection letter came shortly thereafter, again, without explanation. I started to feel like I had entered Dickens’ Office of Circumlocution.

I posted to the ABA listserv requesting feedback from my fellow practitioners about how to appeal a rejected W-7. All the responses were the same: you cannot. The only recourse is to file another application. However, if I do not understand why the ITIN unit rejected the original application, how can I hope to be successful in a second application? Furthermore, the education record had become stale because, according to the W-7 instructions, the records are only acceptable for 12 months from the end of the school term for which the record pertains. To file another W-7 would mean the time-consuming and arduous task of obtaining other documents from Mexico.

The Taxpayer Bill of Rights guarantees my client the right to: challenge the IRS’s position and be heard; appeal an IRS decision in an independent forum; and pay no more than the correct amount of tax. How could we appeal and where could my client be heard? Several weeks later, we received a math error notice stating that my client had erred in calculating the correct amount of tax because he was denied a dependent exemption due to lack of a valid tax identification number for his dependent. A light bulb went off. We could get to the issue of the wrongly denied ITIN by protesting the math error notice!

Section 6109(i)(1) authorizes the Secretary to issue an ITIN, “if the applicant submits an application, using such form as the Secretary may require and including the required documentation.” Section 6109(i)(2) defines required documentation to include “such documentation as the Secretary may require that proves the individual’s identity, foreign status, and residency.” The implementing regulation is found at Section 301.6109-1(b)(3) and states, in relevant part, that the applicant “must apply for [an ITIN] on form W-7.” An ITIN will be assigned to an individual on the basis of information reported on Form W-7 . . . and any such accompanying documentation that may be required by the Internal Revenue Service. An applicant for an [ITIN] must submit such documentary evidence as the Internal Revenue Service may prescribe in order to establish alien status and identity.

The regulation gives latitude to the IRS to prescribe the types of allowable documents. However, that latitude is limited by the APA. Judicial review under the APA allows a court to examine a final agency action, so long as it is not committed to agency discretion or otherwise precluded from review by statute. Section 706 requires that with respect to any agency action, a reviewing court must “hold unlawful and set aside agency action found to be,” among other things, “arbitrary, capricious, [or] an abuse of discretion.”

The arbitrary and capricious standard requires agencies to engage in reasoned decision making prior to issuing a determination. Motor Vehicle Mfr. Ass’n v. State Farm Auto Mut. Ins. Co., 463 U.S. 29, 52 (1983). Courts will invalidate agency determinations that fail to “examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” Id. at 43 (internal quotation omitted).

In this case, a reasonable person could make the argument that the denial of my client’s dependent’s ITIN application was arbitrary and capricious under State Farm because the IRS did not articulate a satisfactory explanation for its action, much less show a rational connection between a report card with “coursework and grades” and proving an applicant’s identity. Not only are the W-7 instructions raising barriers for the most vulnerable taxpayers by requiring “coursework” rather than grade point averages, a rational connection with a legitimate state interest is tangential at best. If fraud prevention in supporting documentation is the IRS’s objective, requiring report cards including “coursework with grades” is both under and over inclusive. It excludes more official government issued educational proof documents, such as the one my client submitted with a grade point average, and includes easily falsified commonplace progress reports. The ITIN unit is wrong to offer no explanation for its decisions that create confusion, frustration, and ultimately an inefficient process that wastes taxpayer resources.

Another possibly narrower argument against the ITIN unit’s actions in my case is that the ITIN unit’s interpretation of Treasury Reg. 301.6109-1(b)(3) is “plainly erroneous” as set in Auer v. Robbins, 519 U.S. 452, 461 (1997). Here the ITIN unit’s requirement for specific coursework versus a grade point average (if this is indeed the problem in my case) does not appear to be at all rationally related to the regulation’s requirement that the document show “alien status and identity.”

Creating opaque guidelines for the most vulnerable taxpayers is fundamentally unfair. Administrative agencies have a duty to the public to provide clear guidelines, tied to legitimate state interests. After all, Nina Olson has told us on many occasions that “[a]t their core, taxpayer rights are human rights.”

Comments

  1. Just to chime in, this has happened to clients now 3 times this year (applications denied improperly). Appreciate the post – glad to know it’s not just me.

  2. Jonathan Perr says:

    We have found the ITIN unit to be very helpful in resolving rejection issues. Calling the 800-908-9982 to the unit directly the agents will pull the case file and explain the deficiency in the application or if the decision was made in error correct the file and submit it for final processing.

  3. Have you tried the local Taxpayer Advocate Office? I recently had a comparably Dickensian experience in a collection case (federal retiree had her pension garnished without notice because of a return processing error). Got nowhere with other IRS offices, but the TAO solved the problem fairly quickly

  4. Steve Odem says:

    TA in Austin has been quite helpful. Keep at it.

  5. Kenneth Ryesky says:

    In other contexts I have found the TAS people to be helpful in cutting through red tape.

    Page 2 of the Form 911 “Request for Taxpayer Advocate Service Assistance” is captioned as “Section Ill – Initiating Employee Information (Section Ill is to be completed by the IRS only),” and I have found that many individual applicants and representatives ignore it.

    However, Section III sets forth the criteria used by the TAS to decide whether or not to accept a case, and its verbiage can be copied and used in the narrative attachment that accompanies Form 911. The relevant criteria for the case you have described might include the following:

    (5) The taxpayer has experienced a delay of more than 30 days to resolve a tax account problem.

    (7) A system or procedure has either fai led to operate as intended, or fa iled to resolve the taxpayer’s problem or dispute with in
    the IRS.

    (8) The manner in which the tax laws are being administered raise considerations of equity, or have impaired or will impair the taxpayer’s rights.

    Of course you will attach the relevant documentation; in such regard, remember that the cognizant TAS bureaucrat would be hard-pressed to act contrary to statements made by the Taxpayer Advocate in reports or testimony, so it may be helpful to give document and page citations when quoting Nina.

  6. One thing that we found out that helped is to become a Certified Acceptance agent. Now the ITIN department actually will call us back and we get a live person to resolve the issue.

  7. John R. Dundon II, EA says:

    I read the post and feel Sarah’s pain. My go to ITIN person is Sharon Bradley at the Atlanta Service Center – of course – sharon.bradley@irs.gov

  8. Norman Diamond says:

    “I started to feel like I had entered Dickens’ Office of Circumlocution.”

    No, you’re still in the reception area outside the office.

    “However, if I do not understand why the ITIN unit rejected the original application, how can I hope to be successful in a second application?”

    Usually it’s more or less random — just like every other tax question. For three tax years the IRS told me and spouse to apply for ITINs despite instructions on Form W-7 itself telling people in our situations not to apply. We gave priority to personally addressed instructions and sent Forms W-7 with accompanying documents. One of those three tax years was one where we had to refile a return so this gave a total of four W-7 applications for each of us up to that point.

    The first rejections stated the reason was because the W-7’s weren’t attached to our return. That was true, we had mailed our return before receiving the IRS’s demand for W-7’s. So I asked the IRS to return our return, we would attach W-7’s and return the return back to the IRS. We’re still waiting for the IRS’s answer.

    The second rejections stated one reason was because my passport was a US passport, but the reason for rejecting my wife was less clear.

    The third time, before applying, I asked the IRS if I should attach my Canadian passport instead of US passport. The IRS said it will take longer than 45 days to answer, but some year there will be a 30-day period when they will answer. The question became moot though. The third time, I attached my US passport for the last time, my wife attached her passport, and the IRS rejected both of us because our passports weren’t attached. A month or two later, the IRS returned our passports by unregistered sea mail from Germany to Japan.

    The fourth time was during the time the IRS still had our passports from the third time. So my wife couldn’t attach her passport, but could only tell the IRS they still had it. I used my Canadian passport. The IRS rejected my wife but did not reject me. The IRS didn’t send me anything about it. However, when I phoned the IRS to ask what to do, they said that if our passports came back from our third attempt before some time limit for the fourth attempt then we could do a re-application for the fourth attempt instead of starting a new fifth attempt. When the passports came back to us we were able to do that, sending them back to the IRS again. The IRS issued an ITIN to my wife, then issued a rejection telling her they had already issued an ITIN and telling her to use it, and issued a rejection to me telling me they had already issued an ITIN and I should use it. Mission accomplished.

    That wasn’t good enough for the US Department of Justice and US Court of Appeals for the Federal Circuit. A different one of our returns that had to be refiled was for a tax year where the IRS didn’t tell us to apply for ITINs, so we obeyed instructions printed on W-7 and didn’t apply. At the time of refiling, my wife had four rejections from the IRS but no acceptance yet. The Federal Circuit ruled that my failure to report a number for my wife demonstrated a lack of genuine and sincere effort to comply with US laws. It didn’t matter that the IRS had accepted the refiled return (while refusing to credit my withholding) because the DOJ and court outrank the IRS. Well, the only way to report a number for her would be to fabricate one. I complied. I told the IRS why I was fabricating a social security number for my wife, included a copy of the court ruling, and the IRS accepted it (but STILL didn’t credit my withholding). The DOJ must be proud of their accomplishment in overturning the work they did in the Silva-Chavez case.

    “Several weeks later, we received a math error notice stating that my client had erred in calculating the correct amount of tax because he was denied a dependent exemption due to lack of a valid tax identification number for his dependent.”

    Lucky you. Courts have ruled that if the IRS makes a secret administrative record of math or clerical error but refuses to send you a notice then you don’t get to appeal. Now pending cert denial.

  9. I’m a Certified Acceptance Agent (CAA).
    If your W-7 is rejected, it would be better to consult a CAA. CAA can call ITIN Unit to discuss an ITIN issue.

    ITIN applicants must submit documentation to establish Foreign Status AND Foreign Identity. Unfortunately foreign school record and foreign birth certificate may establish foreign status only (see W-7 Instruction). So she would need something more to prove her foreign identity.

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