ELITE ADVISOR BEST PRACTICES
Important IRS Changes for Advisors with International Clients
IRS changes ITIN procedure to impact migrants
By Deepa Venkatraghvan
- Beginning January 1, 2013, the IRS will implement improvements to the Individual Taxpayer Identification Number (ITIN) application process.
- These changes make the process of getting an ITIN a little more cumbersome than before and will impact individuals who have recently moved to the United States or those who plan to move in the near future.
- As advisors, it is important to give your clients a heads-up on these changes so that they prepare for the application well in advance of the tax filing due date.
Beginning January 1, 2013, the IRS will implement improvements to the Individual Taxpayer Identification Number (ITIN) application process. These changes make the process of getting an ITIN a little more cumbersome than before and will impact individuals who have recently moved to the United States or who plan to move in the near future.
As advisors, it’s important to give your clients a heads-up about these changes so they can prepare for the application well in advance of the tax filing due date.
Let’s look at the changes and their impact.
What is an ITIN?
An ITIN is a tax processing number issued by the IRS.
When does one need an ITIN?
The IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and who are not eligible to obtain, a Social Security number (SSN). Some examples:
Your client arrived in the United States on a visa that does not permit his or her dependent spouse to work (for instance, an H1). However, there are certain benefits such as an increased standard deduction and personal exemption if he or she files taxes as “married filing jointly.” But in order to file as such, the spouse would need an ITIN.
If your client moved to the United States and his or her spouse is still in another country, he or she will still be able to claim the spouse’s personal exemption in the tax return, provided the spouse has an ITIN.
If the dependent spouse has foreign financial assets and foreign income such as interest or dividends from foreign securities, he or she must declare those assets in the United States and pay taxes thereon. He or she would need to file a tax return and would hence need an ITIN.
Your client has come to the United States with his or her children who are not eligible for an SSN. However, if he or she wants to claim their personal exemptions as well as child tax credits on their tax return, he or she would need to get an ITIN for them.
If your client is a nonresident of the United States but received certain payments on which tax was deducted at the source, he or she would need an ITIN in order to claim a refund of the same.
Apart from tax purposes, your client may need an ITIN (in case he or she is not eligible for a SSN) if he or she is applying for a credit card or a mortgage.
What is the new procedure for getting an ITIN?
In order to see what has changed, let us look at the earlier rules. In order to get an ITIN in the past, all you needed to do was submit, along with your tax return, an application on Form W7 and notarized copies of certain documents such as a passport, visa, birth certificate, school records, etc. The ITIN would be issued within four to six weeks.
However, the IRS found that this easy process also brought about fraudulent claims and, hence, now the documentation requirements have become far more stringent. Here are the new requirements:
- Applicants will now be required to send the originals of the above-mentioned documents to the IRS.
- Instead of submitting the original documents directly to the IRS, applicants now have the option of approaching a Certified Acceptance Agent. The agent can issue a “certificate of accuracy” for the applicant’s documents, which can then be submitted to the IRS instead of having to submit the original documents. You can find a list of agents here.
- The ITIN would expire in five years, after which renewal would be required.
Currently, the IRS has appointed acceptance agents in several overseas countries. If your client resides in any other country, he or she will be significantly impacted. Earlier, those residing abroad and requiring an ITIN could submit a certificate in the form of an “apostille” from agents in their country of residence. Now they, too, must submit either original documentation or a “certificate of accuracy” from the acceptance agent. If the country does not have IRS-appointed acceptance agents, applicants will need to submit original documents either to the IRS directly or to an acceptance agent in the United States.
Exception: Certain categories of people are exempt from this new documentation procedure. This includes military spouses and dependents and nonresident aliens applying for ITINs for the purpose of claiming tax treaty benefits.
What happens to ITINs already in effect?
The IRS has not yet announced the impact of these new rules on ITINs already in effect. But it does appear that these ITINs will expire and renewal processes will come into effect.
The new procedures mean one thing—a longer time to get an ITIN. Thus, advisors should give their international clients a heads-up about the new procedure so they can be ready with necessary documents and certificates.