IRS Notice 2016-48: The effect of the PATH Act on ITIN Provisions
ITINs are alternatives to SSNs that are required in a number of situations involving foreign nationals. Some significant changes to the ITIN program were set in motion last year, and some of those changes are becoming action items now, with the beginning of the 2016 tax return filing season and the expiration of certain ITINs. The purpose of this notice is to describe those changes and explain how you should handle them.
IRS Notice 2016-48, released in 2016, explains significant changes to the Individual Taxpayer Identification Number (ITIN) program introduced by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), enacted on December 18, 2015. The notice further explains how the Internal Revenue Service (IRS) will implement the changes, and the potential consequences to taxpayers who do not renew an ITIN when required by the PATH Act.
What is an ITIN?
An ITIN is a nine-digit tax processing number issued by the IRS to foreign nationals and others who are not eligible for a US Social Security Number (SSN). Generally, you can obtain a SSN if you are a US citizen, are a lawful permanent resident (i.e. green-card holder) or have a valid work permit. If you are eligible for a SSN, then you may not apply for an ITIN. You will need to have a valid reason for obtaining an ITIN and must be able to prove both your residency status and identity.
Reasons for requiring an ITIN
The main reasons for applying for an ITIN include the following:
- You need to file a US tax return (e.g. Form 1040 or 1040-NR)
- You have received US sourced income
- You are a non-resident spouse or dependent of a US citizen or resident
- You are making a claim for a US tax refund (e.g. reclaiming US taxes withheld on dividends or royalties)
- You have a US bank or investment account
- You have a US mortgage
- You have sold (or intend to sell) US real estate
- You are expecting a scholarship or fellowship grant
Implementation of the PATH Act means certain ITINs will need to be renewed beginning in 2017
Prior to the PATH Act, a taxpayer applied for and received an ITIN only once. The ITIN remained in effect unless the taxpayer applied for and received a SSN. Under the PATH Act, any ITIN that is not used on a federal tax return for three consecutive tax years, either as the ITIN of an individual who files the return or as the ITIN of a dependent included on a return, will expire on December 31 of the third consecutive year in which a return was not filed. For example, an individual applied for and received an ITIN in 2015 that is used in 2015 on the individual’s 2014 federal income tax return. If the individual does not file or is not claimed as a dependent on a tax return in 2016, 2017, and 2018, the ITIN will expire on December 31, 2018. This rule applies to all ITINs regardless of when the ITIN was issued.
For ITINs issued before 2013, the PATH Act provides that ITINs will no longer be in effect according to the following schedule, unless the ITIN has already expired due to nonuse for three consecutive years as described above:
- ITINs issued before 2008 will remain in effect until January 1, 2017.
- ITINs issued in 2008 will remain in effect until January 1, 2018.
- ITINs issued in 2009 or 2010 will remain in effect until January 1, 2019.
- ITINs issued in 2011 or 2012 will remain in effect until January 1, 2020.
The ITIN application process
The basic process for applying for an ITIN will not change as a result of the PATH Act. Individuals apply for an ITIN by submitting Form W-7, Application for IRS Individual Taxpayer Identification Number. Most taxpayers must submit their Form W-7 with the tax return for which the ITIN is needed. Both domestic and foreign applicants may submit their Form W-7, tax return, and the required documentation by mail to the ITIN Operation Unit in Austin, Texas. Original documents or certified copies of documents from the issuing agency are the only acceptable documentation, except for a few very limited exceptions, and must be mailed along with the application. In-person applications may be submitted to an employee of the IRS authorized to review and accept applications. Individuals who apply in person, other than dependents, will receive their documentation back once the in-person application is completed. Applicants may also submit their application packet in person at an IRS Taxpayer Assistance Center. Not all locations provide this service and many do so only by appointment.
Alternately, applicants may submit their application package (i.e., Form W-7 and supporting documentation) with the assistance of a Certifying Acceptance Agent (CAA) without having to mail their documents to the IRS or apply in person.
What is a Certifying Acceptance Agent?
A Certifying Acceptance Agent (CAA) is a person (i.e. an individual or an entity) who, pursuant to a written agreement with the Internal Revenue Service (IRS) is not only authorized to assist an alien individual and other foreign persons in applying for an ITIN for tax purposes only, but also assumes a greater responsibility in facilitating the application process. They do so by certifying the application’s supporting documents (i.e. the applicant’s identification documents), thus eliminating the need to mail the original documents to the IRS for authentication.
A Certifying Acceptance Agent is able to:
- Prepare the IRS Form W-7, Application for Individual Taxpayer Identification Number (ITIN), and associated tax return, on behalf of the foreign individual.
- Review the required supporting documents to verify the applicant’s identity and foreign status.
- Issue a Certificate of Accuracy to the IRS that the ITIN application is complete, accurate and that the documentation provided to us for review is authentic. This eliminates the need to mail original supporting documents to the IRS.
- Submit the application and completed tax return* on behalf of the foreign individual to the IRS ITIN Operations office for processing.
- Receive the ITIN directly from the IRS and communicate directly with the IRS on behalf of the applicant with respect to the issuance of the ITIN.
What do I do next?
ITINs that have not been used in the last three consecutive years
ITINs that have expired due to nonuse in the last three consecutive years, as described above, may be renewed any time by submitting a Form W-7 and required documentation. These individuals may renew their ITINs without having to attach a tax return to the Form W-7. Alternatively, individuals may wait to submit their Forms W-7 with their tax returns.
ITINs issued prior to January 1, 2013 and currently in use
ITINs issued prior to January 1, 2013 that have been used on a tax return in the last three consecutive years are set to expire based on the multi-year schedule described above. Under the PATH Act, this schedule is based on the date that an ITIN was issued. However, many ITIN holders may not know when their ITIN was issued and previously had no reason to keep a record of the date an ITIN was issued.
To simplify the renewal process and allow for the effective administration of the program, the IRS will administer the renewal of ITINs on a schedule that is different from the schedule in the PATH Act. The IRS will renew ITINs based upon the fourth and fifth digits (middle digits) in the ITIN. ITINs that contain the middle digits of 78 or 79 are no longer in effect beginning January 1, 2017. The expiration and renewal schedules for ITINs with middle digits other than 78 or 79 will be announced in future IRS guidance.
To reduce the burden on taxpayers, the IRS will accept Forms W-7 from each member of a family in a single family submission starting October 1, 2016, if at least one of the family members is required to renew an ITIN because the middle digits are 78 or 79 and that family member received a Letter 5821. For this purpose, family members include the filer, the filer’s spouse, and any dependents claimed on the filer’s return.
Use of an ITIN solely on an information return
An individual whose expired ITIN is used only on information returns filed and furnished by third parties, such as Forms 1099 or 1042-S, is not required to renew the ITIN. ITINs may continue to be used for information return purposes regardless of whether they have expired for individual income tax return filing purposes. Third parties who file and furnish information returns with an expired payee ITIN will not be subject to information return penalties under Sections 6721 or 6722 solely because the ITIN is expired. If the individual is later required to file a tax return or will be claimed as a dependent, the ITIN will need to be renewed at that time.
Much of the impact of the PATH Act on ITINs is beginning to be felt now, and readers who need ITINs are encouraged to act before the absence of one is problematic. Some CPA firms, including ours, serve as Certifying Acceptance Agents, and can directly assist applicants with original or renewal applications. To learn more, contact Stuart Lyons, international tax principal, at 1.800.244.7444.
* Alternatively, you might meet one of the few exceptions under which an ITIN will be issued without an attached US tax return. An example is if you expect to receive certain types of US income which is subject to US tax withholding or information reporting in the tax year. In this case, the payer will often demand an ITIN in order to facilitate the withholding and remittance, or to apply for full exemption of the withholding.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.