Common Challenges in ITIN Applications and How to Overcome Them

Applying for an Individual Tax Identification Number (ITIN) can a simple process but it can also get complicated. In this blog, we will explore some of the common challenges the ITIN application process.

Documents

The most common obstacle in applying for an ITIN is getting the appropriate documentation for the taxpayer or dependent. The documentation must be valid. Nothing expired can be used. The IRS has a short list of specific documents that can be used to establish the applicant’s identity and foreign status. You can overcome this challenge by requesting from all applicants a valid passport with at least 6 months before expiration. This is a stand-alone document for ITIN application purposes which means, for taxpayers, that it is the only form of identification that they will need in order to apply for their ITIN. Dependents with passports will need additional documents based on age. If the applicants do not have passports, valid government issued photo IDs and original birth certificates will be the next documents to request.

Tax Purpose

Not everyone is eligible for an ITIN.  ITINs are issued based on need and “tax purpose” to individuals with U.S. tax-filing requirements who do not qualify for a social security number. From the purview of the IRS, the sole purpose of the issued ITINs is to facilitate required tax filings. While there are exceptions to the tax filing requirement, just wanting an ITIN for any other reason may not be enough to qualify for an ITIN, and this can present as a challenge when a prospective client calls requesting one. You can overcome this challenge by familiarizing yourself with the exceptions to the tax filing requirement.

Additionally, simply because an individual was issued an ITIN in the past that does not mean that they are necessarily eligible for renewal if it expires. Tax purpose can change from year to year. For example, year 1, an ITIN applicant may be the dependent of a taxpayer living in the USA and meeting the substantial presence test. The “tax purpose” for the dependent is the tax credit and possible change of filing status that the dependent brings to the tax return. Year 2, the dependent is no longer a dependent. They continue to reside in the USA and meet the SPT. They are self-employed and listed as the primary taxpayer on their own tax return. In year 2, meeting their tax filing obligation is their tax purpose. Let us change the scenario a bit and say that in year 2, instead of remaining in the USA, the dependent returned to their country of origin. They did not meet the SPT for the year, they have no US filing requirements for that year, and they are not able to be claimed as a dependent. They have no tax purpose for that year and they do not file a tax return. After a period of non-use, the IRS will automatically deactivate the unused ITIN. Later on, if the individual, once again, has a US tax filing requirement or tax purpose, they would need to apply for their ITIN to be renewed. An ITIN that is used every year is not at risk of deactivation.

Tax Work

Over the last decade, two large legislative packages passed into law (PATH & TCJA) which included verbiage that changed the tax law as it relates to ITINs. Before these tax law changes, the tax treatment of ITIN holders was (almost) identical to that of a citizen (minus the eligibility for EITC).  Due to the legislative changes from the Protecting Americans from Tax Hikes Act, there are no retroactive credit claims for ITIN holders. This means that in order for an ITIN-holding taxpayer to get their maximum refund available, they need to file on time (including extensions) each year. This seemingly small change had a huge impact ITIN tax filing because it prevented taxpayers with newly-issued SSNs from amending their prior-year tax returns to claim credits for which they were previously ineligible, such as the Earned Income Tax Credit (EITC).

ITIN holders are not eligible for the Earned Income Credit, even if the taxpayer's listed dependent children are US citizens. However, ITIN-holding taxpayers were eligible for the Child Tax Credit and the Additional Child Tax Credit until the first Trump administration passed the Tax Cuts & Jobs Act.  The TCJA removed personal exemptions which was an inherent tax purpose for ITIN-applying dependents. It prevented ITIN-holding dependents from being eligible for the Child Tax Credit and the Additional Child Tax Credit while creating a less-beneficial credit for dependents who did not qualify for the CTC or ACTC called the Other Dependent Credit.

Because of these legislative changes, timing is important to ensure that the tax return is correct and accurate in requesting credits for dependents on which their respective tax purposes depend. The real challenge here is attempting to prevent an ITIN rejection for lack of tax purpose due to timeliness, which you can overcome by staying on top of current tax laws and by filing the taxes on time.

For example, let us say that a small family needs to file taxes and apply for ITINs. They are low-income, self-employed ITIN applicants with an ITIN-applicant dependent. If the only tax on the return is self-employment tax, the credit for other dependents is unused and irrelevant. Unless the dependent has another tax impact, like a filing-status change, they may have lost their tax purpose.  On a tax return that has multiple ITIN applications, it is not uncommon for some applications to be approved and others rejected. After ITIN processing, the tax return gets processed and automatically adjusted to omit any rejected applicants.

These are just a few of the challenge areas in the tax world when you work with ITIN applications, but by requesting up-to-date identification documents, staying on top of tax law changes, and familiarizing yourself with the ITIN exceptions, you will be more effective and able to reduce redundant tax work which will save you (and your client) time and money.