Taxpayers who are not eligible for Social Security Numbers (SSNs) need to apply for and receive an ITIN to pay their income taxes and to avoid: (1) delays receiving tax refunds; (2) interest and penalties on underpayments of tax, and (3) unnecessary backup withholding on non-employee income (reported on one of the various form 1099s).
How can individuals not eligible for SSNs (such as non-resident aliens with U.S. tax liability) comply with U.S. tax filing requirements when filling out paperwork that asks for an SSN or an individual taxpayer identification number (ITIN)?
What is an ITIN and What is it for?
An TIN is a tax processing number issued by the Internal Revenue Service (IRS). It is a nine-digit number that always begins with the number nine and has a range of 70-88 in the fourth and fifth digit. In 2011, the range was extended to include 900-70-0000 through 999-88-9999, 900-90-0000 through 999-92-9999 and 900-94-0000 through 999-99-9999.
The IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain, an SSN from the Social Security Administration (SSA).
It is important to recognize that an Internal Revenue Service Number (IRSN), which is very similar in appearance, is not the same as an ITIN. An IRSN is also a nine-digit number issued by the IRS to persons who file a return or make a payment without providing a taxpayer identification number (TIN). A taxpayer would not have been issued this number if they had previously filed a U.S. federal tax return and did not have an SSN.
Who Must Have an ITIN?
Anyone who must pay U.S. taxes, but who is not eligible for an SSN, must have an ITIN to pay their taxes. For example, resident aliens, non-resident aliens, spouses from another country (a.k.a. alien spouses), alien dependents who are ineligible for an SSN, nonresident alien students and professors, and dependents of non-resident alien spouses may need an ITIN to pay U.S. taxes. If you do, or believe you might, fit one of these examples (or find yourself in need of filing a 1040 or being on someone else’s 1040 without an SSN), you will need to apply for an ITIN.
Note that taxpayers who have applied for and expect to receive an SSN should not submit an ITIN application. However, if the SSN is denied, an ITIN application is necessary, to which a copy of the denial letter must be attached.
ITIN renewals can be submitted at any time, but failing to renew prior to filing an annual 1040 can cause delays. For 2019 all ITINs issued before 2013 with middle digits of 83, 84, 85, 86, or 87 (Example: (9XX-83-XXXX) will also expire at the end of the year.
Why are ITINs so Hard to Get?
In short, it is difficult to reliably confirm a person’s identity and ensure that an applicant is the person they claim to be. The timeline for submitting and receiving an ITIN adds to this difficulty. Unless one of five exceptions applies, applications for ITINs are submitted with the original 1040 for which they will be used, however, the IRS takes at least seven weeks to process ITIN applications (nine to 11 weeks during peak processing periods). Even if a taxpayer already has an ITIN, the requirement to obtain and timely apply for an ITIN must be met for non-resident alien spouses on joint returns, separate returns in which the taxpayer will claim an exemption for their spouse, and when the spouse also plans to file a 1040. Complicating matters further, you cannot electronically file a return with an ITIN for the year it is issued.
There are also are many steps in the process, each of which may be cause for a mistake that prevents or delays ITIN issuance. For example, information on an ITIN application must match that of the identifying documentation. Identifying information with old information (e.g. old addresses on an otherwise valid driver’s license) would be a poor choice to include with the W-7.
Finally, a limited number of valid forms of identification and confirmation of ties to a foreign applicant for the taxpayer as well as any dependents (including non-resident, alien spouses) must be provided. The IRS only accepts originals or certified copies, but additional advance planning is usually necessary to obtain certified copies from offices located in one’s home country or the consulate/embassy located in the U.S. Some forms of accepted ID have latent weaknesses or are treated uniquely by the IRS. For example, an original civil birth certificate is required for applicants under the age of 18 if they do not have a valid passport.
What Can You Get an ITIN For?
Employees or wage earners use ITINs when filling out W-9s (to avoid backup withholding), filing annual tax returns (1040s), and for listing dependents on those annual tax returns (for which the dependent needs an ITIN). The information provided, including the ITIN, is necessary for employers to generate proper 1099s and avoid a duty to automatically withhold 24% of the amounts paid. Prior to 2018, the backup withholding was 28%. Similarly, ITIN or other Tax ID may be necessary for filing certain informational returns (such as Form 5471 Information Return of U.S. Persons With Respect To Certain Foreign Corporations).
A foreign taxpayer’s withholding agent will need the ITIN for the “beneficial owner” of property for which a W-8 is being filed. Forms in the W-8 series for which an ITIN is necessary include the W-8ECI (Certificate of Foreign Person’s Claim that Income is Effectively Connected with the Conduct of a Trade or Business in the U.S.), W-8EXP (Certificate of Foreign Government or Other Foreign Organization for U.S. Tax Withholding and Reporting), and W-8IMY (Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for Tax Withholding and Reporting).
Finally, some owners of foreign accounts who do not have an SSN or other Tax Identification Number need an ITIN for the annual Foreign Accounts Tax Compliance Act (FATCA) report (form 8966). Not all form 8966 filers need an ITIN, but those with substantial ownership of passive Non-Financial Foreign Entities (NFFEs), Direct Reporting NFFEs, Sponsored Direct Reporting NFFEs, and specified U.S. persons owning certain equity or debt interests in an Owner Documented Foreign Financial Institution (ODFFI) will need an ITIN for Part III of the 8966. More information about NFFEs is available via Treasury Regulations Section 1.1471-1(b)(132); ODFFIs in Regulations Section 1.1471-5(f)(3).
What Do You Do if You Can’t Get an ITIN ?
An ITIN is not required for filing an extension or to file and pay estimated taxes (IRS form 1040-ES or 1040-ES-NR), or for a wage payor to make backup withholdings of 24%. So the best way to avoid interest and penalties is to make a good faith estimate of tax liability, file, and pay (or withhold) while also applying for an ITIN. A temporary IRSN may be assigned in the interim.
The following payments are subject to backup withholding:
1. Rents and commissions, non-employee compensation for services, royalties, reportable gross proceeds paid to attorneys and other fixed or determinable gains, profits, or income payments reportable on Form 1099-MISC, Miscellaneous Income.
2. Interest reportable on Form 1099-INT, Interest Income.
3. Dividends reportable on Form 1099-DIV, Dividends and Distributions.
4. Patronage dividends paid in money or qualified check reportable on Form 1099-PATR, Taxable Distributions Received From Cooperatives.
5. Original issue discount reportable on Form 1099-OID, Original Issue Discount, if the payment is in cash.
6. Gross proceeds reportable on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions.
7. Gambling winnings reportable on Form W-2G, Certain Gambling Winnings, unless subject to regular gambling withholding. If not subject to regular gambling withholding, backup withholding only applies if, and only if, the payee does not furnish a taxpayer identification number to the payor.
8. Gross payments reportable on Form 1099-K, Payment Card and Third Party Network Transactions.
9. Form 1099-G payments that are subject to backup withholding under IRC 6041 and 3406(b)(3)(A) which include taxable grants and agricultural payments (1099-G Box 6 or 7)
Payments that are excluded from backup withholding include real estate transactions, foreclosures and abandonments, cancelled debts, distributions from Archer Medical Savings Accounts (MSAs), long-term care benefits, distributions from any retirement account, distributions from an employee stock ownership plan (ESOP), fish purchases for cash, unemployment compensation, state or local income tax refunds, and qualified tuition program earnings.
Creative Objections to Getting an ITIN Are Not Well Received by the Courts
ITIN litigation is not very common. Nevertheless, disputes have arisen in the context of alleged religious discrimination at work. In EEOC v. Allendale Nursing Center, for example, an employee refused to obtain an SSN for her employer to avoid participating in the Social Security system she believed to be “unbiblical.” 996 F. Supp. 712 (WDMI Mar. 6, 1998). She instead sought an ITIN. The federal district court was not persuaded that this employee’s religion entitled her to an ITIN instead of an SSN because she did not meet the statutory criteria for an ITIN. More specifically, the employee was a U.S. citizen eligible for an SSN and not an employer (which might have made her eligible for an Employer Identification Number). The court held that the employee’s dispute was with the IRS and that the employer was not discriminating against her by complying with constitutionally-sound federal law. This concept and the Allendale Nursing case have been treated well by the courts since then. In El Horin Yisrael v. PER Scholas, Inc., the plaintiff employee sued his employer, claiming the requirement he obtain an SSN to pay taxes amounted to religious discrimination. 2004 U.S. Dist. LEXIS (SDNY Apr. 2, 2004). The court was not convinced, citing Allendale Nursing in support of its conclusion that “an employee is not able to establish a prima facie case of religious discrimination based on an employer’s insistence that the employee provide an SSN for tax withholding purposes.” The same logic applies to ITINs.
Transactions with the government are inevitable. An ITIN is required for these transactions when the taxpayer owes U.S. taxes but does not qualify for an SSN. ITINs are difficult to obtain and difficulties might be reason to file too early, too late, or not at all.