ITINs - exceptions and questions.

• Author: Bauman, Christine C.
• Position: Individual tax identification numbers

In December 2003, the IRS implemented significant changes to its individual tax identification number (ITIN) program; see Olmstead, Tax Practice & Procedures, "ITIN Application Changes," TTA, April 2004, p. 244, and Laffie, News Notes, "ITIN Program Revisions," TTA, February 2004, p. 69.

Reasons for Change

According to IRS Commissioner Mark Everson, about 25% of the 7 million ITINs issued since 1996 have never actually appeared on a tax return. Further, a General Accounting Office (GAO) study (GAO-04-529T), "Individual Taxpayers Identification Numbers Can Be Improperly Obtained and Used" (3/10/04), concluded that the IRS remains limited in its ability to verify applicants' identifies. The report provides an example of GAO staff obtaining an ITIN, prior to December 2003, by submitting bogus documents through the mail and using the number to open a bank account and obtain an ATM card. At a March 11, 2004, hearing before the House Oversight Subcommittee, written testimony by the Treasury Inspector General for Tax Administration reported that ITIN issuance is rising sharply, with a 36% increase between 2001 and 2002: it suggested that the current problems surrounding ITINs are likely to get worse.

Exceptions to ITIN Procedures

In general, taxpayers requesting an ITIN expressly to comply with income tax filing obligations must file a completed Federal return with Form W-7, Application for IRS Individual Taxpayer Identification Number. However, this requirement has four exceptions.

Exception 1: Passive income--treaty benefits or third-party withholding. To obtain an ITIN under this exception, a taxpayer must include documentation with the Form W-7 showing ownership of the asset that generates income subject to information reporting or withholding requirements. For example, a holder of financial accounts would provide evidence of opening an account and having an ownership interest in the account.

Exception 2: Other income (wages, salary and compensation)--treaty benefits or foreign student receiving scholarship or fellowship.

Exception 3: Third party reporting--mortgage interest. To obtain an ITIN under this exception, a taxpayer must include documentation with Form W-7, showing evidence of a home mortgage loan, such as a loan commitment letter or a broker's listing agreement.

Exception 4: Disposition by foreign person of U.S. real property interest. An ITIN may be required by foreign persons, to apply for a withholding certificate to reduce or...