NTA Blog: Now is the Perfect Time for the IRS to Make Improvements to the Individual Taxpayer Identification Number Program
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For years, I’ve been writing about the problems with how the IRS runs the Individual Taxpayer Identification Number (ITIN) program. ITINs are required for persons who are not eligible for a Social Security number (SSN), but who have a tax filing requirement. My 2017 Annual Report to Congress includes a discussion of how the IRS fails to analyze the unique characteristics of the ITIN population and understand their needs. Most recently, I wrote in my Fiscal Year 2019 Objectives Report to Congress about how the IRS is missing the opportunity to make needed changes to the ITIN program that are feasible due to the potential effects of recent legislation. I want to turn to this topic again today and provide some numbers that further support the trends and related arguments I made. I’ll conclude with a heartbreaking story from a recent TAS case that demonstrates how the IRS’s ITIN policies are harming taxpayers. (The taxpayer has given us consent to share this story.)
In recent years, Congress passed two laws that have had a significant impact on ITIN taxpayers or will so in the following years. In 2015, Congress passed the Protecting Americans from Tax Hikes (PATH) Act of 2015, which made many changes to the ITIN program, laying out rules for how to apply, when an ITIN must be issued to receive certain tax credits, when an ITIN expires, and when the IRS can use its math error authority to deny credits related to an ITIN. Under the PATH Act, an applicant must apply by providing original identification documents or copies certified by the issuing agency, or have those documents certified by a Certifying Acceptance Agent (CAA) or a Taxpayer Assistance Center (TAC).
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which changes certain tax benefits for tax years 2018 through 2025 that were previously available to ITIN holders. The TCJA requires a qualifying child to have an SSN issued by the tax return due date to claim the Child Tax Credit (CTC), including the refundable portion known as the Additional Child Tax Credit (ACTC). Before, a timely-issued ITIN was sufficient for claiming the credit. The new law also eliminated the dependency exemption for these years, which could previously be claimed for ITIN holders residing in the United States, Canada, or Mexico, and meeting other requirements.
These changes result in a major opportunity for the IRS to make needed adjustments to the ITIN program. First, there is less of a concern about ITINs being used for purposes other than tax administration because under the PATH Act, they now expire after three consecutive tax years of non-use. Thus, the IRS could relax its strict requirement that taxpayers must apply for a new ITIN with a paper tax return during the filing season to show a tax administration purpose for the ITIN. The IRS already allows renewal applicants to apply prior to the filing season, presuming they have a tax administration purpose for the ITIN based on past use. The IRS could extend this flexibility to all ITIN applicants and could even require alternative proof of tax administration purpose, such as pay stubs or bank statements demonstrating the taxpayer will have a filing requirement.
Second, the removal of the refundable ACTC for children with ITINs sharply limits the potential for fraudulent refunds associated with ITINs. Already, the number of taxpayers claiming the ACTC for children with only ITINs has been plummeting in recent years – from almost 900,000 in processing year (PY) 2014 to a projected 300,000 for PY 2018. (A processing year runs from January through December and excludes two or three cycles at the beginning of the calendar year when data is not posted to the master file.) TAS predicts during PY 2019, when the ACTC can only be claimed for children with ITINs on prior year returns, the IRS will only receive about 15,000 ACTC claims for ITIN children.
At present, the IRS requires dependent applicants to mail original identification documents to the IRS unless they use a CAA or TAC. However, CAAs can only certify birth certificates and passports for dependents, and TACs can only certify birth certificates, passports, and national I.D. cards for dependents. Thus, with a reduced risk of claiming fraudulent refundable credits for ITIN children, the IRS should reconsider its limitations on CAAs and TACs that prevent them from certifying all identification documents for ITIN dependent applicants. This would allow more ITIN applicants to avoid sending their original identification documents to the IRS, risking loss of documents (more on that later).
Finally, ITIN applications are projected to plummet because of the TCJA’s restriction on the CTC and ACTC, and its elimination of the dependency exemption during tax years 2018-2025, which should cause the IRS to reconsider the mail service it uses to return original identification documents. During the last four processing years, an average of 1.3 million ITINs per year were used to claim the dependency exemption. This year, we’ve already seen a sizable decrease in new ITIN applications, and as of the first week of October, the IRS had received only about 570,000 new ITIN applications, almost 8 percent lower than the same time last year and about 40 percent lower than the IRS had projected. At the same time, due to the increased number of ITINs expiring that have been used in recent years, we’ve seen an increase in renewal applications – approximately 545,000 received as of the first week of October, compared to only 304,000 received at the same point last year. However, in the coming years, we expect the number of renewal applications to level off as the IRS completes the deactivation of all ITINs issued prior to 2013 as required by the PATH Act.
Even though returning all original identification documents by expedited mail may be prohibitively expensive with the current number of ITIN applications and renewals (the IRS previously stated this could cost millions of dollars), the IRS could at least return all original identification documents by mail with some type of tracking service. This way, the IRS could see where each document was and at what stage of processing. The ITIN application could ask for the taxpayer’s email or cell phone number so that the taxpayer could consent to having the IRS email or text the tracking number to the taxpayer. The IRS could also use text or email to prompt the taxpayer to contact the IRS about a change in address, which would reduce the risk of lost documents.
TAS recently received a case from a parent who is a citizen of another country and working in the United States on a visa. The taxpayer applied for and was an issued an ITIN for his young child; yet, the taxpayer never received back from the IRS the child’s passport and U.S. entry visa. This has created significant problems for the family. First, the child now has no legal identification. Second, even though the family can apply for a new passport for the child, the parents and child would have to travel to their home country to receive a U.S. entry visa. Third, under the family’s terms of admission into the United States, they must leave the country and return in early 2019. The family had planned to take a short vacation to a contiguous country, but now, without an entry visa for their child, they must return to their home country during this time and go through the entire visa application and interview process again. Including the airfare, accommodations, and living expenses, the family estimates the trip will cost approximately $7,000, which is money they do not have. This case shows how the IRS’s continued procedure of mailing original ID documents with no tracking system significantly harms taxpayers.
Issues with the ITIN process continue to harm taxpayers and impact taxpayer rights, particularly the right to quality service and the right to a fair and just tax system. Now is the perfect time for the IRS to reconsider its mailing procedure as well as its policies regarding when taxpayers may apply for an ITIN and which documents may be certified by CAAs or TACs for dependents. For further discussion of my concerns regarding ITINs see my FY 2019 Objectives Report to Congress.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.