Updates for ITIN Holders

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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.

About Christine Speidel

Christine Speidel is Assistant Professor and Director of the Federal Tax Clinic at Villanova University Charles Widger School of Law. Prior to her appointment at Villanova she practiced law at Vermont Legal Aid, Inc. At Vermont Legal Aid Christine directed the Vermont Low-Income Taxpayer Clinic and was a staff attorney for Vermont Legal Aid's Office of the Health Care Advocate.

Comments

  1. As a private CAA (and EA) we have witnessed huge increase in rejections. One was on renewals of ITIN’s for dependents. Pre Covid we would submit the application without a previously filed tax return attached. In August 2020 when the IRS opened back up, those applications were rejected. When I called the ITIN office I was told, you have to submit a copy of previously filed return showing the ITIN used. I stated this was not needed before. The answer was we could look it up before, now we can not. If it is not physically in the packet, it will be rejected. All since then with a copy of a return have been approved. Post Covid it has been a hot mess, I question often why I continue to provide this service.

  2. Bob Kamman says

    IRS posted this update on August 20:

    “The IRS is opening and processing Form W-7s as quickly as possible despite social distancing requirements. We are currently processing Form W-7s that were received in May 2021, with majority of receipts being from the second week of May. We are taking every action to minimize delays, and we are processing requests in the order they were received. The taxpayer will be notified once the ITIN is assigned or if additional information is needed. Original identification documents that are submitted with the Form W-7 will be returned to the taxpayer at the mailing address of record as quickly as possible. The associated tax return will then be submitted for processing.”

    “Other than responding to any requests for information promptly, there is no action the taxpayer should take. They should not file a second Form W-7 or tax return or contact the IRS about the status of their Form W7 or their return. Eligible taxpayers who need to obtain or renew an ITIN may submit Form W-7 and the related tax return and documentation now if they have not previously filed. Please refer to the Instructions for Form W-7 for eligibility requirements.”

    Comment: “Despite social distancing requirements?” Maybe they could move their desks farther apart? With so many employees working from home, they should be able to find space.

    https://www.irs.gov/newsroom/irs-operations-during-covid-19-mission-critical-functions-continue

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