The IRS has issued guidance on how it deal with the new rules on Individual Taxpayer Identification Numbers (ITINs) that were contained in the Protecting Americans Against Tax Hikes Act of 2015 (PATH) in Notice 2016-48.
The IRS is authorized under IRC §6109 to issue identification numbers for taxpayers and request information from such taxpayers. Generally these ITINs are issued to taxpayers who are not eligible to receive a social security number (SSN) and are used for tax matters in lieu of the social security number.
In the PATH Act Congress decided to add a specific formal expiration period to ITINs. The IRS had previously announced (News Release 2014-76) that ITINs that had not been used in five consecutive years would cease to be valid, but that program had not yet come to the point where it would revoke numbers. Congress stepped in and reduced the five year period to three years, as well as providing for a general reapplication requirement for any ITINs issued before 2013 on a rolling schedule.
As the Notice explains:
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 tax year of nonuse. 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. (But note that this schedule is going to be modified by the IRS--see later in this article)
The Notice provides the procedures to be followed by those who have an “expired” ITIN due to either rule to reinstate their ITIN.
For those falling under the “three year” rule whose ITINs will expire on January 1, 2017, the IRS will allow them to apply to renew their ITIN beginning October 1, 2016. The Notice provides:
ITINs that have expired due to nonuse in the last three consecutive years, as described above, may be renewed anytime starting October 1, 2016 by submitting a Form W-7 and required documentation. These individuals may renew their ITIN without having to attach a tax return to the Form W-7. Filers should use the most recent revision of the Form W-7 and check the box that says "renewal." Filers should follow the instructions on the Form W-7 and include all the information and documentation required by the instructions except for the requirement to attach Form W-7 to a tax return. Alternatively, individuals may choose to wait to submit their Form W-7 with their tax return. Once the Form W-7 renewal application is approved, the individual's ITIN will again be effective, and the individual can continue to use the same ITIN. The applicant will receive a letter from the IRS stating that the application has been approved. Once renewed, an ITIN will remain in effect unless it is not used on a tax return for three consecutive years.
The notice next goes on to deal with the “pre-2013” ITINs and getting them reissued when they expire. The Notice points out that many ITIN holders may reasonably not know when their ITIN was actually originally issued, so the IRS is going to, effectively, change the expiration dates to use a date based on the middle digits of the ITIN rather than the date originally 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 will no longer be 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 guidance.
Note that if you have previously informed clients about this matter you likely need to contact them with regard to this change of approach—the fact they had an ITIN issued in 2009 or later does not mean their ITIN will not expire on January 1, 2017.
The IRS will notify affected taxpayers as follows:
Beginning this summer, the IRS will send a Letter 5821 to individuals holding ITINs with the middle digits of 78 or 79 if the ITIN was used for a taxpayer or a dependent on a U.S. income tax return in any of the last three consecutive tax years informing them that they may submit a Form W-7 with original or certified documents to renew their ITINs. The Letter 5821 will be sent to the address used on the most recent income tax return on which the ITIN appears or the most recently updated address for the taxpayer who filed the tax return provided to the IRS by the taxpayer or the U.S. Postal Service.
The application process for the 78/79 ITINs is explained as follows:
An individual with an ITIN that contains the middle digits of 78 or 79 who is sent a Letter 5821 may submit a Form W-7 and required documentation to renew their ITIN starting October 1, 2016. These individuals may renew their ITIN without having to attach Form W-7 to a tax return. Filers should use the most recent revision of Form W-7 and check the box that says “renewal.” To expedite processing, filers should include a copy of Letter 5821. Filers should follow the Instructions for Form W-7 and Letter 5821 and include all the information and documentation required by the instructions except for the requirement to attach Form W-7 to a tax return. The IRS anticipates that for applications mailed to the IRS under this process, documents will be returned to the applicant within 60 days from the date the application was received. Alternatively, individuals who are sent a Letter 5821 may choose to wait to submit their Form W-7 with their tax return. Once a Form W-7 renewal application is approved, the individual's ITIN will again be effective, and the individual can continue to use the same ITIN.
The IRS also is creating a special program for families where multiple members of the family have ITINs to allow them to apply for whole family when the first “pre-2013” expiration takes place:
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.
The notice goes on to explain the consequences to a taxpayer if he/she fails to renew their ITIN after it has expired:
Once renewed, an ITIN will remain in effect unless it is not used on a tax return for three consecutive years. The issuance date of a renewed ITIN is the date the ITIN was originally issued, not the renewal date. Some individuals may not be aware that their ITIN has expired or that they must renew an expired ITIN. Returns filed by these individuals will be accepted by the IRS; however, there may be a delay in processing these returns, and certain credits, such as the Child Tax Credit and the American Opportunity Tax Credit, may not be allowed unless the ITIN is renewed. This could result in a reduced refund or additional penalties and interest. The IRS will notify these filers about the delay and any reduction in refunds and credits claimed and will inform them about the need to file Form W-7 to renew their ITIN.
The notice also provides that if the holder of an ITIN is now eligible to apply for an SSN that person should obtain the SSN rather than new the ITIN.
If an ITIN is used solely on an information return (such as a Form 1099) but not on a tax return the ITIN can continue to be used for information return reporting even though it has expired. No penalties will be assessed again information return filers who use such an expired ITIN. This last item is important for business taxpayers to note, as they have not (at least yet) been drafted by Congress to “police” the ITIN reissuance rules.