Written by Sally Taylor, CPA, PFS, MSFP, CFP®
In a year-long internal audit, the IRS discovered that undocumented workers were fraudulently filing tax returns using Individual Tax Identification Numbers (ITINs) that were obtained using fake documents. These unauthorized persons were filing tax returns and obtaining credits and refunds that they are not entitled to. Simply by having an ITIN, an illegal alien working in the US was able to benefit from credits that are meant for legal US taxpayers.
A credit that has been reportedly abused is the US federal child tax credit that intended to assist low-income US citizens and their families. The child tax credit is one of several “family-friendly” provisions that are part of the US tax law and provide individual taxpayers a credit on their taxes based solely on the taxpayer’s number of qualified children. To qualify for the credit, each child must be a US citizen under the age of 17 and be claimed as a dependent on the taxpayer’s return.
The Inspector General has launched its own audit based on the findings by the IRS, but has already reported that in 2005, 796,000 ITIN filers claimed child tax credits totaling $924 million, and by 2008, the claims rose to 1,526,276 ITIN filers claiming child tax credits of $2.1 billion. In 2010, 2.3 million ITIN filers claimed child tax credits totaling $4.2 billion. The abuse didn’t stop with child tax credits, it also extended to earned income credits and other credits meant to benefit US resident taxpayers. The Inspector General reported that immigrants make up approximately 13% of the US population, but they disproportionately received 26% of all earned income tax credits in 2008.
In an effort for the government to close these loopholes, the IRS has created new “interim” rules that are intended to strengthen the ITIN application process but will make it more difficult to obtain an ITIN. Before June 22, 2012, the documentation required to obtain an ITIN included either a completed Form W-7 along with a notarized or certified photocopy of an original valid passport or at least two other supporting documents such as a birth certificate and a driver’s license.
Under these new rules, the IRS will only issue an ITIN when the application includes original documentation, such as passports and birth certificates, or copies of these documents certified by the original issuing agency. It will not accept non-certified copies, nor will it accept notarized copies or copies certified by anyone other than the original issuing party or organization. Therefore, when an application for an ITIN is now sent in to the IRS, it must include original documents or copies certified by the issuing agency.
The IRS may require some taxpayers who have already filed applications, but who have not yet received their ITINs, to supply additional information. For those persons who already have ITINs, there will be no additional action required.
Final rules are expected to be issued before the start of the 2013 filing season which begins in early 2013.