A PATH through the new ITIN rules

May, 03 2017 by Jean Lee Scherkey, EA

The path to tax return completion can be fraught with winding schedule instructions and unexpected detours found in legislation. We trudge through each line, hoping a refund awaits just above the signature line. For some of you who filed or who are in the process of filing an income tax return containing an Individual Tax Identification Number, or ITIN, your journey to the completion of your tax return may be longer than anticipated.

Everyone who is required to file an income tax return or was included on a return as a spouse or dependent, must have a unique identifying number. For most of us, this is our Social Security number. When a person is ineligible to receive a Social Security number, an Individual Tax Identification Number or ITIN must be obtained. An ITIN is a nine-digit number that begins with numeral nine, and is formatted in the same manner as a Social Security number. The most common reason why a person may be ineligible to receive a Social Security number is he/she is a nonresident alien, nonresident alien spouse or a person who qualifies to be claimed as a dependent on an income tax return, but is unable to get a Social Security number. It is acquired by filling out and submitting to the IRS Form W-7, along with the requisite supporting documentation and required income tax return. Unless they meet one of the exceptions listed in the Form W-7 instructions, a person requesting an ITIN number must have a valid filing requirement.

The Protecting Americans from Tax Hikes (PATH) Act of 2015 made several changes to the ITIN rules. Previously, once a person obtained an ITIN, there was no expiration date on the number, unless it was not used on an income tax return for five consecutive years. With the implementation of the PATH Act, tighter renewal procedures are now in place. These changes are meant to help curb the prevalence of identity theft and other types of fraud. ITINs that were not used on an income tax return during the last 3 consecutive years, expired as of January 1, 2017. Moving forward, if an ITIN is not used on an income tax return for three consecutive years, the ITIN will expire on December 31^st of the of the third consecutive year of nonuse. Any ITINs that were issued before 2013 began to expire as of January 1, 2017, and will expire on a multi-year schedule to be implemented by the IRS. The first set of ITINs that expired as of January 1, 2017, are those whose fourth and fifth (middle) digits are 78 and 79.

During the summer of 2016, the IRS began mailing Letter 5821 to people whose fourth and fifth ITIN digits are 78 and 79. Letter 5821 explains the steps needed to renew an ITIN. To renew an ITIN number, IRS Form W-7 must be completed, along with original or certified copies of the requested documentation attached. To expedite processing, the IRS recommends including a copy of Letter 5821 when submitting Form W-7. To help ease the administrative burden on households where there is more than one person with an ITIN, the IRS is permitting an entire household to renew their individual ITINs at the same time, if someone’s middle digits are 78 or 79. Although each member in the household with an ITIN will need to fill out their own Form W-7, all the forms may be mailed together in one package to the IRS.

What happens if you inadvertently filed your 2016 income tax returns using an expired ITIN number? Returns that were already filed and contain an expired ITIN will more than likely experience delays in processing, which will mean a delay in receiving any anticipated refund. The IRS will treat returns that contain an expired ITIN as if a math error has occurred. Generally, the taxpayer will receive either a CP11 or CP12 notice from the IRS. These notices will indicate an expired ITIN was used, which resulted in a math error because the exemption deductions and credits associated with the expired ITIN have been disallowed. Some common tax credits that could be impacted are the Child Tax Credit, Additional Child Tax Credit, American Opportunity Tax Credit and Earned Income Tax Credit. This could mean the difference of receiving a refund or owing tax. Barring any other issues, once an expired ITIN is renewed, the disallowed exemption deduction and credits will be restored. Keep in mind, if you do not renew an expired ITIN, the exemption deductions and credits associated with the ITIN may not be restored, and penalties and interest may accrue on the additional tax incurred. For more information about the ITIN renewal process, please click HERE to review additional information from the IRS website.