New Pre-Tax Return ITIN Applications
The Internal Revenue Service (IRS) issues individual taxpayer identification numbers (ITINs) to individuals who have a U.S. tax administration purpose requiring a taxpayer identification number (TIN) but who are not authorized to work in the United States and, therefore, are not eligible to obtain a Social Security number (SSN).
On December 17, 2003, the Internal Revenue Service announced tighter procedures for issuing ITINs, focusing primarily on the federal tax administrative requirement for filing a U.S. tax return. As a result, the original Form W-7 instructions ignored a number of other tax administrative purposes requiring a TIN. New Form W-7 instructions issued in January 2007 rectify some of these lapses (the instructions did not address state tax administrative process requirements for a TIN either time).
Income Tax Treaty Claims
IRS tax rules require recipients claiming exemption from withholding on U.S.-source income under an income tax treaty (other than income from publicly traded investments or income related to loans of certain securities) to submit to the payer prior to payment a withholding certificate that includes a TIN. Two categories of treaty-exempt income of nonresident aliens require such a withholding certificate.
In the event that the payee of either type of income is a U.S. resident for tax purposes, a treaty-annotated Form W-9 is required instead of a Form W8-BEN or 8233. Note that U.S. residents are generally not eligible for treaty benefits on FDAP income or self-employment income under treaties.
Form W-7 instructions include the following exceptions for these two income categories:
FDAP Income: Exception 1: Passive Income now provides generally that individuals claiming tax treaty benefits for an exemption from, or reduced rate of, withholding on passive income may submit evidence on the Form W-7 application that they are entitled to claim tax treaty benefits.
ECI: Exception 2: Other Income now provides that an individual claiming tax treaty benefits for an exemption from tax on income from non-compensatory scholarship and fellowship grants may submit evidence of the treaty exemption. Such evidence includes:
Exception 2 instructions also expand on the procedures included in the prior Form W-7 instructions for treaty-exempt claims. The instructions indicate that recipients of treaty-exempt honorarium payments submit with their Form W-7:
Other instructions with the Form 8233 exception may be helpful for individuals authorized to be employed in the United States who are not in the U.S. long enough to obtain an SSN.
U.S.-source taxable scholarship and fellowship grants of nonresident aliens are subject to withholding at either a 14 percent or 30 percent rate. The income and taxes withheld must be reported on Form 1042-S. Under the prior Form W-7 instructions, grant recipients were unable to obtain a pre-tax return ITIN. As a result, recipients of such taxable grants had to submit a Form 1042-S lacking a TIN with their tax return and ITIN application to the ITIN Unit. Such recipients who had already left the United States failed to do so because processing from abroad was either too costly or too difficult, or both.
The new instructions include such recipients of grants under Exception 2. Evidence required to be submitted includes:
Under Exception 2, F, J, M, and Q grant recipients who are not employed are not required to first apply for an SSN. However, they must submit a letter from their DSO or RO stating that they will not be securing employment in the U.S. or receiving any type of income from personal service. (A strict application of this wording could preclude obtaining an ITIN for treaty exempt grants in years prior to securing employment if the likelihood of future employment were known to the DSO or RO).
Exception 1 clarifies that resident alien bank account holders may apply for a pre-tax return ITIN. Generally, only nonresident aliens with bank account interest related to a U.S. trade or business, such as a U.S. rental property, may apply for a pre-tax return ITIN. Other nonresidents lack a tax administrative purpose for such an ITIN because their bank account interest is not subject to withholding, reporting, or taxation. Such a restriction will prevent nonresidents from opening a bank account in banks that require a TIN to open an account. The IRS is aware that many banks who are also certifying acceptance agents have been erroneously submitting W-7s for foreign nationals in this situation, and indicated in October of 2006 that they may be scrutinizing such behavior in the future.
Paula Singer, Esq. chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer, Newton, MA, has over 25 years of experience providing advice and compliance services to employers on cross-border employment matters. For more information, visit www.windstar.com. For additional information, call 1-800-259-6398 or email: firstname.lastname@example.org.
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