ITINs: The Rules Have Changed

Editor: Valrie Chambers, Ph.D., CPA

Individual taxpayer identification numbers (ITINs) are used for a number of tax reporting purposes. They are commonly used by undocumented taxpayers who have a tax filing requirement. In these situations, an ITIN is obtained by completing a Form W-7, Application for IRS Individual Taxpayer Identification Number, for the taxpayer or anyone else shown on the tax return who needs a taxpayer identification number, and filing it with a tax return (prepared without listing the identification numbers being requested). Once the IRS issues the ITIN or ITINs, the taxpayer can file required prior-year returns and state or local tax returns.

As a general rule, a taxpayer filing with an ITIN has been able to claim the same exemptions, deductions, and credits as a taxpayer filing with a Social Security number (SSN). For example, the child tax credit, including the additional child tax credit, and the American opportunity tax credit are allowable to taxpayers using ITINs to satisfy the taxpayer identification number requirement for those credits. A major exception to this rule is the earned income tax credit (EITC). Sec. 32(m) requires the taxpayer and/or a qualifying child to have an SSN, other than an SSN issued to apply to receive benefits from a federally funded program, to claim an EITC.

In the past, taxpayers could claim an EITC, a child tax credit, or the American opportunity tax credit on an amended or late-filed return with an SSN or ITIN obtained after the return’s original due date. However, this will not be the case going forward.

The Protecting Americans From Tax Hikes (PATH) Act of 2015, passed as part of the Consolidated Appropriations Act, 2016, P.L. 114-113, established new limitations for returns filed after Dec. 18, 2015. Section 204 of the PATH Act amended Sec. 32 to require that a taxpayer can use an SSN to obtain an EITC only if it was issued on or before the due date of the return involved. In the past, a taxpayer could file amended returns for up to three years to claim the EITC if the taxpayer was able to obtain an SSN. The new provision disallows retroactive filing of either amended or original prior-year returns to claim the EITC.

Similarly, Sections 205 and 206 of the PATH Act added limitations on claiming the child tax credit, including the additional child tax credit, and the American opportunity tax credit by providing that a taxpayer identification number can be used to claim those credits only if it was issued on or before the due date of the return. The new provisions do not specify whether the due date for these purposes is the original due date or the due date with a timely filed extension. The major impact of this change will be on taxpayers using newly issued ITINs. As is the case with the provision affecting the EITC, these provisions disallow retroactive filing of either amended or original prior-year returns that were due before issuance of the ITIN to claim the child tax credit or the American opportunity tax credit.

The issue date requirement presents potential timing issues for the 2017 tax season regarding returns prepared to accompany Forms W-7 where the taxpayer claims the child tax credit or the American opportunity tax credit. However, for 2015 returns only, an exception to the general issue date rule is in place. The issue date requirement for the EITC, the child tax credit, and the American opportunity tax credit is waived for a 2015 return filed on or before the due date. For example, if a taxpayer included Form W-7 with a timely filed return for 2015, the issue date rule does not apply for that return.

For 2016 returns filed in 2017, the issue date rule applies. Thus, the ability to claim the child tax credit or the American opportunity tax credit could be related to the issuance of an ITIN by the IRS. If a taxpayer files Form W-7 with an accompanying tax return before the due date but the IRS does not issue the ITIN until after the due date of the return, will the IRS disallow the child tax credit? The IRS currently takes four or more weeks to issue an ITIN. Because of this time lag, the IRS would not process an ITIN application filed later in the tax season in time. Possible solutions to this potential problem could be a legislative change to apply the same timely filed return provision applied to 2015 returns to subsequent filings or a change by the IRS in its process for issuance of an ITIN with a tax return. In either case, taxpayers and practitioners clearly need guidance before next filing season.

In addition to some procedural changes regarding the application process, Section 203 of the PATH Act amended Sec. 6109 to provide expiration dates for ITINs. ITINs issued after Dec. 31, 2012, will not expire unless they are not used on a tax return for three consecutive years. ITINs issued before Jan. 1, 2013, will expire on an applicable date based on their year of issuance, or if they are not used on a tax return for three consecutive years, whichever occurs earlier. The applicable date for ITINs issued before 2008 is Jan. 1, 2017; issued in 2008, Jan. 1, 2018; issued in 2009 or 2010, Jan. 1, 2019; and issued in 2011 or 2012, Jan. 1, 2020.