Will the Commissioner agree that a filing extension is necessary so that all eligible children can claim the enhanced Child Tax Credit?

July 19, 2022 by Leave a Comment

We welcome guest bloggers Luz Arevalo and Angela Divaris from Greater Boston Legal Services. GBLS is part of a coalition of nonprofit organizations who seek to maximize access to the expanded child tax credit for 2021. Angela and Luz highlight the problem of otherwise-eligible CTC claimants without a US taxpayer identification number who did not file an ITIN application or an extension of the filing deadline by April 18, 2022. Under IRC 24(e)(2), those families will miss out on the credit if nothing is done.

PT has covered barriers to receiving ITINs in several prior posts including last summer when ITIN delays and the cumbersome requirement to paper-file applications were highlighted in the NTA’s 2022 objectives report to Congress. Back in 2016, Patrick Thomas and Lany Villalobos wrote about the impact of the PATH Act and other ITIN issues described in the NTA’s 2015 annual report to Congress.

A related issue recently surfaced which I found interesting as it implicates several different administrative problems facing the IRS. In 2020 and 2021, the IRS encouraged people with expiring ITINs to renew early, separately (and before) filing their tax return to avoid refund delays. This well-intentioned message had unintended consequences, recently revealed in the NTA’s 2023 objectives report to Congress.

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The NTA explains that even if an individual submitted an ITIN renewal application well in advance before filing their tax return, due to processing backlogs the IRS computer system may have disallowed the CTC on the return via math error. Many people do not contest a math error notice (for various reasons), and the IRS does not always abate math error changes upon request although it is legally obliged to do so. Frustratingly, the IRS does not automatically restore the disallowed tax benefits when the ITIN unit catches up and restores the taxpayer’s ITIN. One wonders what “the right to a fair and just tax system” means if IRS processing delays can result in permanent disallowance of tax benefits intended to help children in a pandemic. TAS’s 2023 systemic advocacy objective number 13 is to restore tax benefits that were disallowed due to ITIN renewal processing delays.

Interestingly, the NTA notes that as of January 1, 2022 ITIN holders can no longer renew “in advance” – they must submit their renewal application with their tax return. I am not sure this is the best solution to the problem since it requires those families to suffer the refund delays that advance renewals were intended to prevent. Fixing the IRS computer systems to prevent the issuance of math error notices when an ITIN application is pending would seem a more taxpayer-friendly solution. Sadly, IT-based solutions are easier said than done when it comes to the IRS.

Christine

Timing is everything.  For many immigrant taxpayers, the time to claim the enhanced Child Tax Credit and the Recovery Rebate Credit ran out on April 18, 2022.  As of this writing, however, we believe that the Service is considering several requests to extend the filing deadline for those immigrant families who did not apply for their taxpayer identification numbers before the filing deadline. 

Section 205 of the 2015 PATH Act requires that a tax filer have been issued a taxpayer identification number or have requested a filing extension before the tax-filing due date (and be issued a TIN by the extended filing deadline) in order to claim a child tax credit.  Many thousands of mixed status households who faced severe obstacles obtaining ITINs or who received their Social Security numbers after the April filing due date are, thus, now tragically prevented from claiming the enhanced Child Tax Credit for their children, most of whom are U.S. citizens, who are otherwise eligible if they had social security numbers.  These immigrant families faced severe pandemic related challenges to filing exacerbated by widespread misinformation regarding their eligibility.

Over 100 organizations signed a letter asking Commissioner Rettig and Secretary Yellen to extend the filing deadline for these households based on the emergency declaration prompted by the COVID-19 pandemic (as authorized by IRC 7508A) and in order to fulfill the legislative intent of the American Rescue Plan Act (ARPA).  Similar requests were made by 7 senators and 28 mayors. The Commissioner has the authority to extend filing deadlines in response to emergency declarations, and the COVID-19 declaration should be considered as grounds to support a one-time filing extension to allow families to claim a one-time emergency benefit.

The 2021 tax year was a critically important one for American families.  The American Rescue Plan Act (ARPA), which was drafted in response to COVID-19 pandemic, directed the IRS to distribute relief funds to the vast majority of families in the country.  Its historic Child Tax Credit expansion has been hailed as a life-line with the potential to slash childhood poverty in the country to its lowest level on record.  There were obvious obstacles in the distribution of the credit to the lowest income households who exist outside the tax system, and especially those in mixed status families.  The IRS recognized that eligibility would not translate into actual access for as many as 2.3 million children.   These low-income households – the ones most needing the refundable credits- were the hardest to reach and became the objects of outreach from the White House down to community groups working on the ground.  It was an impossible task to complete during filing season.  Many of these children who predictably fell through the cracks had a parent who faced the added burden of obtaining an Individual Taxpayer Identification Number (ITIN) and are now out of time.  The equitable administration of ARPA will be served if all the children contemplated continue to enjoy the same access to this historic relief in a time of crisis.

Should this deadline be extended, there will be a need for advocates to reach these deserving children by participating in targeted outreach and filing assistance.

Filed Under: Individual Taxpayer Identification Number (ITIN), Refundable Credits, Taxpayer advocate Tagged With: ,

2021 Year in Review – Administrative Matters Part 1

December 29, 2021 by 1 Comment

The job of my dreams from 15 years ago has just come open.  The University of Florida, home to one of the best LLM programs in tax in the country, has decided to make it even better by starting a low income taxpayer clinic.  When I was preparing for retirement from Chief Counsel back in 2007, I looked around for a teaching position and especially wanted one in Florida or somewhere in the South if I could not find one in Virginia.  I applied for a couple of positions in Florida but the schools had no interest in me, which was fortunate because I ended up at Villanova where I could not have been happier except that the weather in PA could have been warmer.  Then I moved even further North, reversing the path of most elderly folks, but again was very fortunate to land at the Legal Services Center of Harvard Law School.  Some lucky person will now have the opportunity to teach and to help taxpayers from a nice warm location.  The announcement:

The University of Florida Levin College of Law seeks a non-tenure-track Legal Skills Professor to serve as the instructor and director for our newly funded Low Income Taxpayer Clinic (“LITC”). This is a wonderful opportunity for a licensed attorney with substantial experience representing clients in disputes with the IRS and a passion for clinical legal education. We welcome applications from licensed attorneys already working in legal academia as well as practicing lawyers seeking to transition to legal academia.

Here’s the link to the position: https://explore.jobs.ufl.edu/en-us/job/519429/lecturer-legal-skills

Lots of administrative matters this year as the IRS pushed out a third Economic Impact Payment (EIP) and pushed out the Advance Child Tax Credit payments.  Congress put a lot of burden on the IRS asking it to shoulder these tasks while the IRS sought to dig itself out from two difficult filing seasons with lots of backlogs.

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ID Verification

Among other things that made the last two filing seasons difficult was the high number of ID verification requests the IRS made to taxpayers.  These requests came at an unprecedented scale.  I had the opportunity to ask Wage & Investment Commissioner Ken Corbin about the volume of these requests in a panel I moderated at the annual conference for Low Income Taxpayer Clinics.  He explained why the volume increased so dramatically and why it would probably go down significantly in the future.  Perhaps the IRS has explained this in other settings, but I had not seen an explanation previously.  His explanation made perfect sense.  The EIPs caused a high number of individuals to file a return who had not previously filed a return or who had not filed a return in a long time.  The returns of taxpayers not in the system generate a much higher level of potential fraud, particularly when filed for the purpose of obtaining a refund in one of these payment programs.  Consequently, the IRS sought to verify the ID of many more taxpayers than normal.  Unfortunately, it was unprepared for the call volume.  Fortunately, it has now developed a system rolled out in late November 2021 that should make the process go much smoother.

Misdated Notices

The IRS regularly sends out mail on a date other than the date on the correspondence.  I don’t condone the practice, but it’s been going on for quite some time.  In 2020, however, the IRS sent out millions of letters with the wrong dates and the wrong instructions, creating more confusion than necessary.  You can find our posts on these notices here and here.  During the pandemic, the IRS held off on sending out some of the notices that would have gone out on a regular cycle.  It did so both because it wanted to give taxpayers a break during the pandemic and because it could not staff the phone lines for the calls that would have inevitably resulted from the notices.  The problem continued in 2021.  As she did in 2020, the NTA blogged on the problem, providing a window into IRS action not otherwise available.  The 2021 correspondence problem does not implicate statutory time frames the way the 2020 misdated notices did.  Instead, the new problem involved the IRS sending 109,000 taxpayers a notice with incorrect information.  The notice not only wrongly told taxpayers of action the IRS did not take but contains a typographical error that compounded confusion.  See our posts here and here.

Cases for the Taxpayer Advocate

The Taxpayer Advocate issued guidance regarding the cases it would accept.  It needed to limit the cases it would take both because of case inventories and because it could do nothing about one of the biggest issues facing taxpayers – finding out what had happened to their return.  Because of significant and continuing delays in processing returns due to the pandemic, an unprecedented number of returns sat at IRS Service Centers waiting for someone to process them.  The delays especially impacted taxpayers who filed paper returns, amended returns and late returns.  These taxpayers turned to TAS when calls to the IRS proved unavailing or went unanswered; however, TAS cannot locate unprocessed returns sitting on a trailer outside of a Service Center.  The inability to turn to TAS for assistance provided further frustration for taxpayers, but the decision not to accept these types of cases seemed only logical given the inability to do much with these cases. 

In TAS-13-0521-0005: Interim Guidance on Accepting Cases Under TAS Case Criteria 9, Public Policy (05/06/2021), the National Taxpayer Advocate (NTA) put out guidance on the public policy cases that the Taxpayer Advocate Service (TAS) will accept.  The guidance regarding case acceptance expires on May 5, 2023. Under Code Sec. 7803(c)(2)(C)(ii), Congress listed several types of cases in which TAS will assist taxpayers and gave the NTA the authority to determine additional matters in which TAS will assist taxpayers. We discussed the issue here.

Updates from Independent Office of Appeals

Good news – Appeals has a customer service number: 559-233-1267.

Bad news – Appeals does not call you back if the case is unassigned, which would be my main reason for calling the number.

The update occurred as part of an event put on by the IRS for its stakeholders.  The executives from Appeals had a brief slide presentation which showed staffing and case levels in Appeals as of January 2021.

ITIN Acquisition

There have been changes made to processes at the ITIN unit related to issuing ITINs to dependents in Canada and Mexico.  Since the TCJA passed, the ITIN unit has begun to require proof of U.S. residency for dependents outside the U.S. prior to issuing an ITIN. These policies are not required by the statute or regulations and have perhaps some unintended consequences for vulnerable communities, particularly as they relate to the calculation of family size for the numerous federal and state agencies that use the tax return for this purpose. These policies also contradict the Form 1040 instructions which instruct taxpayers to include dependents from Mexico and Canada on the return.

Unfortunately for ITIN applicants, there is no easy way to appeal a rejection of an ITIN application, making these changes especially burdensome. Requesting an abatement of the math error notice that is issued after an ITIN rejection may provide the only way to appeal a rejected ITIN application. However, sometimes the IRS denies ITINs in situations where the inclusion of the ITIN applicant on the return does not change the amount of tax due, and no math error notice will issue. Creative litigators will have to figure out what remedies are available for a wrongfully denied ITIN application under these circumstances.

Exercise of Discretion Not to Offset Recovery Rebate Credits

The offset statute gives the IRS discretion to decide when to offset.  For the first two stimulus payments, Congress directed that the only offset would be for past due child support; however, it did not limit the IRS’ ability to offset when it passed the final stimulus payment.

A post by the NTA sets out some of the history on what the IRS did as it moved into the 2020 filing season. 

Congress prohibited offset of the first two stimulus payments (EIP), except against past due child support, which were made in 2020.  In passing the third stimulus payment (RRC), Congress did not create the same offset restriction.  Nonetheless, the IRS decided to exercise its discretion under 6402(a) with respect to the offset of federal tax refunds to federal tax liabilities.  The IRS allowed refunds based on RRC to pass through to taxpayers without being offset to satisfy prior federal tax debts.  Great news for persons with only federal tax debts in their portfolio of debts subject to offset under the Treasury Offset Program (TOP), but less good news for taxpayers with other outstanding obligations.  For a detailed discussion of offset and an explanation of TOP, you can read an article by me forthcoming in the Florida Tax Review found here.

The NTA points out two problems with the otherwise good news regarding the IRS decision to forego offset of refunds based on RRC.  First, the decision happened in the middle of the filing season after many taxpayers had already filed and already had their refunds offset.  A similar offset decision occurred in 2020 when the Department of Education decided during the middle of the filing season not to exercise its right to offset federal tax refunds (and other federal payments) against outstanding student loan debts.  Individuals who filed early (i.e., those most likely to have substantial refunds) get treated differently than those who wait. 

A similar issue occurred during the 2021 filing season with unemployment benefits that Congress decided mid-filing season to exclude from income (although the IRS created a way to fix this for early filing taxpayers without the need for them to file a superseding or amended return).  So many problems are created for tax administrators when Congress makes changes during the filing season.  The IRS deserves much credit the past two years for adjustments it has had to make during the filing season while operating under pandemic restrictions.  These type of adjustments can contribute to the processing delays for which the IRS gets a black eye.

Innocent Spouse and the Administrative Record

We received correspondence from PT reader James Everett of DeFranceschi & Klemm, PC in Boston.  Mr. Everett represents the taxpayer in Sutherland v. Commissioner, which Christine blogged here and I blogged here in the 2020 year in review post because of the importance of this case.  For those who do not remember Sutherland, it involves the issue of IRC 6015(e)(7) which limits Tax Court review in innocent spouse cases to the administrative record, including cases pending at the time of enactment that had already gone through the administrative process prior to the legislation creating the limitation.  The case was rescheduled for trial in 2021.

The national office interjected itself into the case and the IRS objected to all documents the taxpayer wanted to include with the stipulation that weren’t part of the “administrative” record (i.e., documents not provided during the administrative stage).  Judge Lauber made it clear he was going to require the IRS to call the appeals officer as a witness at the trial to discuss the record.  A few days before the trial, the IRS dropped its administrative record objections.  Judge Lauber asked the respondent’s counsel if this reflected Service-wide policy (i.e., the IRS agreed that §6015(e)(7) didn’t apply to pending cases); respondent’s counsel candidly replied that this was above his paygrade to comment on – he could only speak to the case at hand.

The withdrawal of objection to the administrative record was great, but based on the record it is not possible to tell if this was specific to the case, a rethink of IRS position, or just a lack of desire to have the AO testify.  The administrative record rule presents significant problems for individuals who go through the administrative process pro se, since they often fail to develop the full record needed if litigation occurs.  We really appreciate the insights provided by Mr. Everett and encourage other readers to provide similar insights if their cases have a significant procedural development.

Filed Under: Appeals, Individual Taxpayer Identification Number (ITIN), Innocent Spouse, Offsets, Taxpayer advocate

Updates for ITIN Holders

August 18, 2021 by 2 Comments

Two issues have come up recently for ITIN holders that I’d like to flag. Thanks to Sarah Lora of the Lewis & Clark Low Income Taxpayer Clinic for prompting this post and providing much of the content.

1. Earlier this spring, NTA Erin Collins wrote a blog post highlighting the delays caused by the paper-filing requirement for ITIN seekers. This issue has gone on so long that I almost forgot it seems strange to people seeing it for the first time.

Taxpayers needing an ITIN may not file electronically.  They must always file a paper return, attaching the return to their ITIN application and mailing the package with supporting documents to the IRS ITIN unit. The IRS’s reasoning is that the attached tax return demonstrates the taxpayer’s need for an ITIN. Taxpayers needing an ITIN renewal fare slightly better: they may obtain the renewal prior to the filing season, which then allows for an e-filed return.  However, when taxpayers seek help with both filing their return and renewing their ITIN during the filing season, the renewal application must be attached to a paper tax return.

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The requirement to paper file has resulted in extraordinary wait times for taxpayers needing ITINs for themselves or dependents.

During 2021 through March 27, the IRS had received over 150,000 ITIN applications, with over 125,000 submitted with a tax return. This number is expected to grow – in 2020, the IRS received over a million ITIN applications, including about 470,000 applications from new applicants, meaning they had to apply with a paper tax return if they did not meet one of the narrow exceptions. These taxpayers are facing a double-whammy this filing season – first, the delay in having an ITIN application processed and second, the delay in having a paper tax return processed. For the week ending March 27, 2021, ITIN applications submitted with a return were taking 25 business days on average just to be input into the system. During this same week, the ITIN unit started with inventory of almost 67,000 applications to be worked and ended with an inventory of over 74,000, reflecting a growing backlog.

The NTA points out that many ITIN holders have dependent children that qualify for the Child Tax Credit (CTC) or Recovery Rebate Credit, creating delayed refunds for those families most in need.

In the post, the NTA suggests that ITIN applicants should not be required to attach a tax return if they can prove a filing requirement some other way, for example by submitting wage documents from an employer. She notes that accepting ITIN applications throughout the year would “prevent unnecessary delays, encourage voluntary compliance, and reward these individuals for doing the right thing by filing U.S. tax returns.”

2. ITIN holders with children who qualify for the CTC are entitled to the advanced CTC. The implementation of this provision has come with some glitches.  First, the IRS computers were initially programed to disallow the AdvCTC if the taxpayer or spouse was an ITIN holder. This programing error prevented approximately 1.2 million families from receiving the first monthly advanced CTC payment in July.  Advocates raised the issue with the IRS, and it appears that the glitch has been fixed and these families should begin receiving their payments in August 2021. According to the IRS news release, these taxpayers will receive the full amount of their AdvCTC:

Such families who did not receive a July payment are receiving a monthly payment in August, which also includes a portion of the July payment. They will receive the remainder of the July payment in late August.

Finally, advocates recently flagged the issue that the ITIN unit may reject ITIN applications for individuals with qualifying children filing 2020 returns with no income, seeking the advanced CTC. There were several reports of both private and nonprofit Certified Acceptance Agents (CAAs) refusing to submit ITIN applications for these individuals.

Sarah Lora previously wrote a post here discussing the ITIN unit’s flawed policy of rejecting ITIN applications where the accompanying paper tax return does not show what the IRS deems a federal monetary tax benefit. This policy rejects a century of tax policy that provides favorable tax treatment to citizens Canada and Mexico, as Sarah argues in a Tax Notes State article here. Even though a 2020 return is the ticket to receiving the advanced CTC, the ITIN unit’s current policy of blindly looking at monetary federal tax benefits on the attached return before them could lead them to reject ITINs for 2020 $0 income returns, preventing children with social security numbers, the vast majority of which are U.S. Citizens, from receiving the advanced CTC.

Because of this ITIN policy, it is logical for CAAs to think they would be wasting their time submitting applications for nonfilers who have “only” a 2021 tax benefit. Legal services attorney Jen Burdick submitted the issue to TAS through the Systemic Advocacy Management System (SAMS). Happily, Jen reports that there is a workaround. According to the Systemic Advocacy employee with whom Jen corresponded, a nonfiler’s 2020 tax return should be processed and the ITIN issued if the Form 1040 shows “Rev. Proc. 2021-24” written at the top of the first page.

Revenue Procedure 2021-24 sets out procedures for nonfilers to file 2020 tax returns in order to obtain AdvCTC payments, and it mentions ITINs at § 4.03(4)(b). Hopefully the ITIN unit will process applications attached to such returns. Because of the delays described above, it is difficult to say whether the ITIN unit is aware of the special 2020 procedures. Please reach out to Sarah at sarahlora@lclark.edu if you find taxpayers facing an improper ITIN rejection.

The workaround is good news, but it is discouraging that it has not been publicized by the IRS. The IRS needs to get the word out to all CAAs, so taxpayers stop getting turned away and told to wait until the 2022 filing season. A crush of ITIN applications next spring is the last thing that the IRS or taxpayers need.

Filed Under: Individual Taxpayer Identification Number (ITIN), Refundable Credits Tagged With:

Further Trials and Tribulations in the ITIN Unit

January 20, 2021 by 4 Comments

We welcome back Sarah Lora, Assistant Clinical Professor and Director of Lewis and Clark’s Low Income Taxpayer Clinic. In this post Sarah discusses an ITIN issue that highlights how many state and federal benefit programs rely upon the federal income tax return for eligibility purposes. The interwoven nature of tax and public benefits has implications for taxpayer rights, particularly in circumstances where the taxpayer lacks a clear path to judicial review of the IRS’s actions. Christine

Today I write about relatively recent changes to processes at the ITIN unit related to issuing ITINs to dependents in Canada and Mexico. I previously wrote about my Dickensian experience with the ITIN unit here. Now I write about policy changes at the ITIN unit related to its interpretation of the TCJA.

Since the TCJA passed, the ITIN unit has begun to require proof of U.S. residency for dependents outside the U.S. prior to issuing an ITIN. These policies are not required by the statute or regulations and have perhaps some unintended consequences to vulnerable communities, particularly as it relates to the calculation of family size for the numerous federal and state agencies that use the tax return for this purpose. These policies also contradict the Form 1040 instructions which instruct taxpayers to include dependents from Mexico and Canada on the return.

Unfortunately for ITIN applicants, there is not an easy way to appeal a rejection of an ITIN application, making these changes especially burdensome. In my previous post, I wrote that requesting an abatement of the math error notice that is issued after an ITIN rejection was likely the only way to appeal a rejected ITIN application. However, because the current policy denies ITINs in situations where the inclusion of the ITIN applicant on the return does not change the amount of tax due, no math error notice will issue. Creative litigators will have to figure out what remedies are available for a wrongfully denied ITIN application under these circumstances.

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Code Section 152(b)(3) allows dependent exemptions to include residents of the United States, and countries contiguous to the United States: i.e., Canada, or Mexico. The TCJA did not change this. Notwithstanding, the ITIN unit began rejecting applications after the TCJA for applicants from Canada and Mexico for lack of proof of U.S. Residency. The W-7 instructions and IRM indicate that the reason for the rejection is because those applicants do not confer an “allowable tax benefit” on the taxpayer, presumably due to the reduction of the exemption amount to $0 for dependents under 151(d)(5)(A).

The IRM lists the following as “allowable tax benefits” for the purposes of issuing an ITIN to dependents from Canada or Mexico: (1) American Opportunity Tax Credit, (2) Head of Household, (3) spouse filing a joint return, or (4) Premium Tax Credit. However, in my experience, it is a struggle to obtain ITINs even in these circumstances. One of the most common scenarios is a rejection of an ITIN for a parent residing in Mexico who is a qualifying relative under IRC § 152(d) and qualifies the taxpayer for Head of Household filing status. While this is clearly an allowable tax benefit under the IRM, the ITIN unit frequently rejects such ITIN applications, resulting in delayed refunds, confusion, and frustration.

It is crucial to note that the language of “allowable tax benefit” does not appear in the statute or the regulation. It is language that appears nowhere else except the IRM and the W-7 instructions – sub regulatory guidance that has had a negative impact on the immigrant community needing an accurate family size count on their tax returns.

The statute allows the Secretary broad discretion to issue ITINs. There is nothing restrictive in the statute: “The Secretary is authorized to issue an individual taxpayer identification number to an individual only if the applicant submits an application, using such form as the Secretary may require . . .” The regulations provide that the Secretary is authorized to issue an ITIN “for use in connection with filing requirements under this title” and “for any individual who . . . is required to furnish a taxpayer identifying number.” That filing “requirement” can be found at code section 151(e) “No exemption shall be allowed unless the TIN of such individual is included on the return claiming the exemption.”

So the IRS can issue these ITINs, but why should they?

First, for an accurate family size count. For better or for worse many state and federal agencies rely on the 1040 to provide accurate family size to calculate eligibility for many non-tax federal and state programs. These include immigration related applications (for example to determine whether an immigrant could be a “public charge”), FAFSA for student loans and aid, emergency Medicaid applications, and state tax returns, particularly where the state exemption amount remains above $0 for dependents satisfying section 152.

Recently, an advocate posted on the ABA listserv that her client was unable to include several qualifying relatives on her tax return, artificially reducing her family size, resulting in a denial of healthcare benefits worth $26,000. Similarly, Oregon is one of many states that allows a deduction on the state tax return for dependents satisfying the requirements of 152(d), but only if the dependents are listed on Form 1040. Without ITINs for their dependents, these taxpayers are not paying the correct amount of state tax.

Additionally, the IRS should issue these ITINs for the sake of efficiency. The Service has been issuing ITINs to these dependents since 1996. Continuing to do so will impose no additional costs (and in fact would save the costs related to scrutinizing of applications and returns for “allowable tax benefits”). It will also create efficiencies for the Service in the future because ITINs not renewed by the Service now will expire and require renewal in 2025 when these provision of the TCJA sunset.

Anyone who has had the opportunity to hear Commissioner Rettig speak knows that he is genuinely committed to serving underrepresented communities and has led while the IRS has taken a number of momentous steps to show that commitment. For example, the IRS recently translated the Form 1040 into Spanish for the first time. I believe issuing ITINs to residents of Canada and Mexico as is permitted under the law is right in line with this commitment and will demonstrate the Service’s desire to support underrepresented communities.

Filed Under: Individual Taxpayer Identification Number (ITIN) Tagged With:

TIGTA Report Shows IRS Has a Long Way to Go On Employment Related Identity Theft

July 17, 2017 by Leave a Comment

The other day I wrote about the Electronic Tax Administration Advisory Committee and its annual report showcasing many successes and improvements IRS made when it came to identity theft. Part of the success ETAAC discussed included a major drop in identity theft receipts, which the report suggests is the product of better detection at the front end of the return filing process. TIGTA, in a report from last month, highlights a different story when it comes to employment related identity theft. Essentially TIGTA found that IRS materially understates the number of employment-related identity theft cases and has had major systemic flaws in informing victims.

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What is employment related identity theft? As most readers know, to gain employment one must have valid Social Security number. Individuals who are not authorized to work in the US sometimes use other peoples’ Social Security numbers to secure employment. They then file a individual income tax return using an Individual Taxpayer Identification Number (ITIN). Individuals whose SS numbers are used by someone else can be in for a surprise after they file a tax return (or do not file due to not having an obligation to file) when IRS may send an Automatic Underreporting (AUR) notice reflecting the income that was earned by someone else who illegitimately used their SS number.

IRS procedures are supposed to catch returns that are submitted by an ITIN user that reflect someone else’s SS # associated with wages. In IRS speak, that is known as an ITIN/SSN mismatch. When all works well, IRS places an identity theft marker on the victim’s account, and prevents victims from getting an AUR notice.

TIGTA found that all does not work well, with a number of systemic issues associated with placing markers on accounts. It examined over a million e-filed returns that had an SS/ITIN mismatch and found that in about 51.8% of the time IRS put the appropriate identity theft marker on the account. The IRS did not place markers on the remaining 48%; that was because many in that 48% group did not have a tax account (Note IRS defines tax account as an active account as one “for which the taxpayer’s Master File account, which contains the taxpayer’s name, current addresses, and filing requirements, etc., exists on the IRS computer system capable of retrieving or updating stored information.”).

Of the e-filed returns, there were another 60,000 or so victims who did have a tax account but still did not have an id theft marker placed; IRS noted various reasons, including its placing only one marker per return even if the return filed has multiple incorrect SS# associated W-2s and that some of the victims were minors and IRS did not have procedures in place to inform minors.

TIGTA sensibly recommended that IRS take steps to improve its process of placing id theft markers on all e-filed returns. IRS generally agreed with the recommendations and said it would monitor progress “and determine, by July 2018, the requisite programming changes needed to ensure that identity theft markers are properly applied when the potential misuse of an individual’s SSN becomes evident.”

In addition to e-filing issues, TIGTA noted major problems that the IRS has had in placing identity theft markers when a return reflecting an ITIN/SS mismatch is not e-filed:

Specifically, guidelines state that a Form W-2 is not required for Line 7 (Wages, Salaries, Tips, etc.) of Form 1040. As such, the IRS has no way to identify ITIN/SSN mismatches associated with paper tax returns. In addition, if the ITIN filer voluntarily attaches a Form W-2 with an SSN, IRS internal guidelines do not require employees processing these returns to place an employment identity theft marker on the SSN owner’s tax account.

TIGTA recommended that IRS require ITIN filers to attach W-2s with their 1040’s; IRS rejected that recommendation because it noted that “wages constitute taxable income under Internal Revenue Code Section 61 and are reportable even when a Form W-2 is not provided or is otherwise unavailable at the time of return filing.” IRS did, however, agree to put better procedures in place when a paper filed ITIN return does in fact include W-2s that reflect a mismatch.

Conclusion

The TIGTA report shows that IRS has a lot of room for improvement. People need to be vigilant, as IRS in many cases does not take action even if it has information that reflects a high likelihood that someone is improperly using a Social Security number. As TIGTA notes, if IRS fails to place an identity theft marker on an account, “victims can be subjected to additional burden when the IRS processes their tax returns.” It may trigger confusing and stressful notices and limit the ability for IRS and others to help victims unwind the effects of the identity thief. IRS needs to do a better job here, as the costs for victims in time, stress and potentially dollars are likely very significant.

Filed Under: ID Theft, Individual Taxpayer Identification Number (ITIN)

The Struggle to Obtain Individual Taxpayer Identification Numbers

February 10, 2016 by 11 Comments

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.

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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.

Conclusion

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.

 

Filed Under: Individual Taxpayer Identification Number (ITIN) Tagged With: ,