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IRS Issues New Rules Regarding ITIN Documentation Requirements

Posted on 03/17/14

On June 22, 2012, the Internal Revenue Service announced interim guidelines to the documentation requirements for persons applying for an Individual Taxpayer Identification Number (ITIN).  The new documentation requirements were effective immediately with the release of the notice.  On November 29, 2012, most of those interim guidelines were made permanent.  A key change to the interim guidelines is that, for the first time, ITINs will expire after five years.  Taxpayers who still need an ITIN will be able to reapply at the end of the expiration period.

A substantial number of ITINs are issued to nonresident aliens who are not eligible to obtain US social security numbers.  An ITIN must be obtained for purposes of reporting certain transactions by nonresident aliens that are subject to US income taxation.  These transactions include the sale of US real estate.

The Foreign Investment in Real Property Tax Act (FIRPTA) subjects a foreign seller of US real estate to a withholding of 10% of the sales price of the property.  If this 10% withholding exceeds the tax due, the seller may apply to have the withholding reduced to the maximum amount of actual tax owed.  In order to obtain approval for a reduced withholding, all parties to the transaction (buyer and seller) must either possess a US tax identification number or apply for one with the filing of the application for the reduced withholding.  Until all parties to the transaction have a US tax identification number, the application for reduced withholding will not be approved.

In order for a nonresident to apply for an ITIN, he must submit documentation with respect to his identity and foreign status.  Prior to the June 22, 2012 announcement, the IRS would accept copies of documents that had been notarized by a US notary public or by a foreign notary acceptable as outlined by the Hague Convention.  Effective June 22, 2012, the IRS no longer accepted notarized copies of documents.  Instead, the nonresident must now submit either original documents or copies of original documents certified by the issuing agency.  Exceptions to the new documentation requirements are for military spouses and dependents and for nonresident aliens claiming a tax treaty benefit.  Notarized documents will be accepted by the IRS in these instances.

Included is a listing of the only supporting documentation (see page 3) that will be accepted by the IRS.  If an original valid passport (or copy certified by the issuing agency) is submitted, no other documents are needed to prove “foreign status” or “identity.”  Otherwise, certified copies or originals of at least TWO of the documents listed on the chart must be submitted, one document from Column A  and one document from Column B.  The documents must be current, verify identity and support a claim of foreign status.

There are several issues with the new documentation requirements.  Many nonresidents travel on a regular basis and cannot relinquish their original passport for a period of 2 months, which is the amount of time the IRS states it will take them to return the passport.  Obviously, there is always the possibility that the passport will get lost or misplaced.  Obtaining a copy of an original document certified by the issuing agency or official custodian of the original record, whether it is a passport or any of the other acceptable documents, is, at best, time consuming and, at worst, impossible to get.

The new documentation requirements impose a substantial burden on nonresidents investing in US real estate directly in their personal names.  Consider the situation where a nonresident alien sells US real estate that is owned personally.  As stated previously, with limited exception, the nonresident alien will be subject to having 10% of the sales price withheld.  Unless the nonresident already possesses an ITIN or submits the documentation as outlined above, he will be unable to apply for a reduced withholding.  Therefore, the entire 10% withholding must be submitted to the IRS within 20 days after closing.  In order for the nonresident to receive a refund of the 10% withholding, or any portion thereof depending on the amount of profit on the sale, a US income tax return must be filed.  The request for refund via the filing of a US income tax return will not be processed until an ITIN is obtained.  Therefore, unless the nonresident alien seller is willing to leave their 10% withholding with the IRS, they will have no other option but to comply with the new documentation requirements.

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If you submit an original valid passport (or copy certified by the issuing agency), you do not need to submit any other documents to prove your “foreign status” or “identity.”  Otherwise, you must submit certified copies of at least TWO of the documents listed in the chart above, one document from Column A and one from Column B.  The documents must be current, verify your identity (that is, contain your name) and support your claim of foreign status.  If you submit copies of documents that display information on both sides, copies of both the front and back must be attached to the Form W-7.

At least one document must contain your photograph, but a photograph is not required if documents are submitted for a dependent under age 14.

NOTE:  Photocopies of documents must bear an original authentic certified seal/stamp placed there by the proper authority (i.e., the issuing agency).

A B
Can be used to establish:
Supporting Documentation Foreign Status Identity
Passport (the only stand-alone document) x x
U.S. Citizenship and Immigration Services (USCIS) photo identification x x
Visa issued by U.S. Department of State x x
U.S. driver’s license x
U.S. military identification card x
Foreign driver’s license x
Foreign military identification card x x
National identification card (must be current and contain name, photograph, address, date of birth, and expiration date) x x
U.S. state identification card x
Foreign voter’s registration card x x
Civil birth certificate  x* x
Medical records (valid only for dependents under age 14 or under age 18, if a student)  x* x
School records (valid only for dependents under age 14 or under age 18, if a student) x x
*Can be used to establish foreign status only if they are foreign documents

About the Author

Renea M. Glendinning

Kerkering, Barberio & Co.
1990 Main St., Suite 801
Sarasota, FL 34236
(941) 365-4617
rglendinning@kbgrp.com

Renea M. Glendinning, CPA, Shareholder, joined the firm in 1987 and has led the International Tax Department since 1996. She has authored articles regarding various international tax issues and frequently gives presentations on U.S. income and estate taxation of foreign nationals doing business in the U.S.

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