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.
read more...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.
I’m guessing that a lawsuit against the IRS under the APA and beyond would be an effective way to challenge the policy to deny ITIN’s to dependents residing in Mexico and Canada.
IRC § 152(b)(3)(A) [One of many IRC exception provisions which (in addition to its double negative language), contains an exception to the exception]:
“The term ‘dependent’ does not include an individual who is not a citizen or national of the United States unless such individual is a resident of the United States or a country contiguous to the United States.”
It would seem that Russia is also “a country contiguous to the United States” by dint of the 4 kilometer proximity of Russia’s Big Diomede Island to Alaska’s Little Diomede Island.
There are many people in the USA who have dependent children in Russia, even as that country now exists following the break-up of the Soviet Union. Not that I have been keeping count, but I do not get the impression that there are many dependents in Russia who have ITIN issues.
[And don’t get me started with talking about the Crimea.].
I had the same thought about Russia.
But I suppressed the urge to comment on it.
I did look up “contiguous” in my older edition of Black’s Law Dictionary. (A client once spotted this on my bookshelf and asked if there was a different law dictionary for white people.) It quotes a 1940 appeals case from here in Arizona that says it is not synonymous with “vicinal.” So I looked up vicinal, and it’s not in that dictionary. However, a Google search did provide some interesting details about vicinal words, in the field of logology. You can look it up.
Actually, the 1867 treaty of Seward’s purchase of Alaska from Russia defines the line running between the Big Diomede Island and the Little Diomede Island as the boundary between the United States and Russia; during the Cold War that line was known as the “Ice Curtain” and there were some minor confrontations entailing it.