It is a common and unfortunate misconception across the U.S. that undocumented or foreign workers do not pay State or government taxes. In fact, many citizens have never heard of an Individual Tax Identification Number (ITIN) or know little to nothing about their purpose or the important role they play within the U.S. tax system.
Yet, this is not the only population in need of enlightenment. One can imagine the number of people who actually need ITINs but lack the information and resources to apply. Paying taxes gives undocumented workers the chance to take part in our society by showing the government that they intend to live according to the law and are of good moral character. ITINs, and their surrounding factors, entitle parents to the child tax credit and enable them to claim dependents, not only in the U.S., but in Canada and Mexico as well.
II. Understanding ITINs
Millions of foreigners enter the United States, legally and illegally, each year and conduct activities that subject them to U.S. filing requirements as a result of generating income on U.S. soil. In order to encourage compliance with U.S. tax laws, the Internal Revenue Service (IRS) instituted a program in 1996 whereby individuals not eligible to receive a Social Security Number (SSN) would be able to file tax returns with an Individual Tax Identification Number (ITIN).
An ITIN functions as a tax processing number and its use is restricted to tax filing purposes. The IRS issues ITINs to qualifying resident and non-resident aliens, as well as to their spouses and dependents. While an ITIN is formatted like a nine-digit SSN that always begins with the number “9”, it is important to note that its purpose differs significantly from that of a SSN.
A. What is the Purpose of an ITIN?
ITINs are used for tax purposes only. The IRS initiated the program with two primary incentives. First, ITINs enable individuals with a U.S. filing obligation to comply with U.S. tax laws even when they are not eligible to receive a SSN. The sheer volume of foreign individuals working, studying, and conducting business in the U.S. necessitates a process by which these persons may account for their income and take advantage of certain U.S. tax benefits.
This is a particularly compelling incentive for resident aliens who intend to undertake the nationalization process to become a U.S. citizen. Prospective citizens must establish good moral character before his or citizenship application will be accepted. Compliance with U.S. tax laws represents a positive step toward establishing one’s moral character in this context. Thus, the availability of ITINs incentivizes legal compliance with filing obligations for many foreign individuals residing and working in the U.S.
Second, ITINs provide a means for the IRS to process and track tax returns efficiently. Again, the high number of individuals who take advantage of this process each year necessitates a uniform and efficient filing method. While valid W-2s do require a number formatted as a SSN, this number operates as a “dummy” number on the tax return and need only be input once on Form 1040.
This also facilitates efficiency since the “dummy” number may remain the same each year should the taxpayer’s employment remain consistent. This provides the IRS with an additional means of keeping track of foreign individuals. Finally, the IRS also needs a consistent means of accounting for payments and refunds distributed to taxpayers not eligible for a SSN, but who are entitled to take advantage of certain U.S. tax benefits or claim a refund of over-withheld tax.
As important as it is to know what purposes ITINs serve, it is equally valuable to understand their limitations. ITINs do not authorize work in the U.S., nor do they establish immigration status. ITINs do not provide eligibility for Social Security Benefits. Taxpayers with ITINs are also not eligible to receive the Earned Income Tax Credit (EITC). Finally, ITIN holders may not utilize an ITIN for identification purposes outside of the tax system.
B. Who is Eligible to Receive an ITIN?
Treasury regulations governing Internal Revenue Code Section 6109 require a valid taxpayer identification number for each person listed in the tax return. Thus, any individual who is not eligible to receive a SSN, but who, nevertheless, must provide a taxpayer identification number to the IRS for any tax purpose must apply for an ITIN. All applicants must have a valid filing requirement in accordance with the provisions set forth in Publication 17, “Your Federal Income Tax,” or Publication 519, “A United States Tax Guide for Aliens.”
Both resident and non-resident aliens may be eligible to receive an ITIN. For example, a U.S. resident alien who satisfies the substantial presence test, but who cannot obtain a SSN would need to acquire an ITIN for tax filing purposes. Any non-resident alien who is eligible to receive a SSN should apply for one before attempting to obtain an ITIN. If the Social Security Administration denies the applicant’s request, then that individual may attach the denial letter to his or her application for an ITIN.
All non-resident aliens required to file a U.S. tax return or who are filing simply to claim a refund are eligible to receive and should apply for an ITIN. A non-resident alien student, professor, or researcher with a valid filing requirement as a result of earned income should obtain an ITIN. Also, a non-resident alien who opts to file a joint return with a spouse who is a U.S. citizen or resident would benefit from an ITIN.
Individuals who can either be claimed as an exemption as a spouse or a dependent on a U.S. tax return, but who are not eligible to obtain a SSN of their own, also are eligible to apply for an ITIN. While they must have a valid ITIN to be claimed at all on the filing party’s return, they do not necessarily have to be a U.S. resident. Thus, a taxpayer with an alien spouse may claim that spouse as an exemption once he or she procures an ITIN. Further, alien dependents, such as parents or children, who reside in Canada or Mexico, are eligible to receive ITINs and be claimed on a taxpayer’s return. However, they must satisfy the dependency requirements. Nevertheless, the broad range of individuals eligible to receive an ITIN furthers the IRS goals of incentivizing compliance with tax laws and ensuring efficient processing of tax returns.
III. Applying for an ITIN
In order to gain an ITIN, each applicant must complete the Application for IRS Individual Taxpayer Identification Number, otherwise known as Form W-7. This form can be obtained by downloading it from the IRS website, calling a 1-800 number, writing to their distribution center, or visiting the closest IRS Taxpayer Assistance Center. By using these various means of communication (internet, telephone, mail and physical presence), the IRS has made this form readily accessible for people of all circumstances.
Furthermore, for those applicants who are more comfortable completing their Form W-7 in Spanish, the IRS provides a Spanish version entitled, W-7(SP). As it stands, Spanish is the only foreign language offered for Form W-7. Whichever option the taxpayer chooses, they must be sure that the application they are completing is the most up-to-date version; if not, the form will be mailed back to them for re-submission, which will negatively effect their processing time. When Form W-7 is ready, it is attached to the taxpayer’s completed tax return and sent directly to the IRS center for ITIN Operation in Austin, Texas. Within six weeks, accepted applicants will receive a letter from the IRS with their assigned 9-digit ITIN.
A. What Information is Needed to Complete Form W-7?
When completing Form W-7, the IRS wants to know why the applicant is filing. The application’s purpose is needed for each individual requesting an ITIN, even if they are just a dependent. Additionally, the ITIN requires basic information including name, foreign and mailing address, country of citizenship, place and date of birth, and the actual signature of the applicant.
It is this last requirement, the applicant’s signature, that causes filing delays, especially when filing for a dependent living abroad. For example, if a taxpayer residing in the U.S. has dependents in Mexico who live in a remote village where mail carriers are basically non-existent, it would take a considerable amount of time for the application to reach the dependent for their signature and return to the U.S. for completion. Therefore, it is suggested that applicants begin this process well before tax season begins.
B. What Documents are Needed to Complete Form W-7?
In order to successfully file Form W-7, each applicant must provide sufficient documentation verifying both their identity and their foreign status. There are multiple ways to prove these two elements, but the most commonly used and highly recommended document is the applicant’s foreign passport. A passport is the only instrument that provides all of the necessary information on its own, without the help of supplemental materials.
If one does not have a passport or is unable to locate it, one may use a combination of the following identifying records: USCIS photo ID, Dept. of State Visa, drivers license, military ID card, National ID card, voter’s registration card, and birth certificate. ITIN applicants who are unable to produce these documents due to their youth can present foreign medical or school records. This exception is adequate only for dependents under the age of fourteen; eighteen if they are a student. All of these documents must be original, notarized or certified copies.
In conclusion, ITINs are issued to people with U.S. tax filing obligations who are unable to receive a Social Security number. ITIN numbers enable the IRS to track tax returns efficiently and enable foreign taxpayers with U.S. tax obligations to comply with U.S. tax laws. The ITIN application process can be challenging and confusing for resident and non-resident aliens that have earned income in the U.S. In order for the IRS and foreign taxpayers to meet their goals regarding tax compliance, it is necessary for the IRS to simplify the ITIN application process and tax filing process for resident and non-resident aliens.