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The IRS tightened the rules on issuing ITIN’s in late December 2003. Prior to this date, a taxpayer could complete the application (Form W-7) and send it to the IRS, along with documentation to support your identity, and the IRS would issue the number. The rules that are now in force require the taxpayer to show a valid reason as to why an ITIN is required and in most instances require the taxpayer to attach a tax return with the application.
There are of course, a few circumstances when a taxpayer needs a number in advance of filing a return and therefore does not have a tax return to attach to the application. Some examples include when a taxpayer is subject to third party withholding on passive income; disposition by a foreign person of US real property; and wages, salary, compensation and honoraria payments with tax treaty benefits claimed. The IRS has taken these instances into consideration and allows a taxpayer to apply for a number when certain exceptions are met.
Let’s consider the sale of US real property by a foreign person. The purchaser or their representative is required to withhold and remit 10% of the gross proceeds to the IRS along with Forms 8288 and Form 8288-A, copies A and B. The purchaser or representative will request a number from the seller, however until now there was no valid reason for the seller to apply for a number.
In this circumstance, the purchaser remits the 10% withholding and the forms to the IRS without the ITIN of the seller. The IRS office will not mail out Form 8288-A Copy B to the seller if the ITIN is missing. The seller can now start the application process for obtaining an ITIN. If not already prompted to apply for an ITIN by the IRS, the seller can submit Form W-7 along with a photocopy of Forms 8288 and 8288-A to the ITIN Unit, illustrating that one of the exceptions for applying for a number in advance of filing a tax return has been met. The IRS office will co-ordinate processing the ITIN application and completion of Form 8288-A by including the ITIN on Form 8288-A, Copy B and mail it out to the seller.
Another popular scenario is foreign persons receiving rental income from US real property. Whomever you choose to manage your rental property should understand the fundamentals of US taxation of foreign investors with US rental income as this person will be recognized as your withholding agent under the Internal Revenue Code. Under US domestic law, gross rental payments are subject to a 30% withholding. However, rental income can be taxed as either investment income through withholding or on a net income basis as effectively connected income without withholding. In either scenario, you are required to provide a number to the withholding agent.
In this scenario the taxpayer meets one of the exceptions for applying for an ITIN in advance of filing a tax return. Form W-7 should be completed by each individual receiving rental income. The applicant should attach a signed letter or document from the withholding agent, on official letterhead, showing the taxpayer’s name and evidencing that an ITIN is required to make payments to the foreign taxpayer during the current year that are subject to federal tax withholding. The application should be sent to the appropriate ITIN Unit of the IRS along with supporting documentation to show proof of identity of the applicant.
Once the taxpayer receives the ITIN from the IRS, they can complete Form W-8 ECI and provide it to their rental agent to have the withholding eliminated if the taxpayer chooses to have the rental treated as effectively connected income by making the appropriate election on their first timely filed income tax return.
When you have completed your application (Form W-7), you can apply for the number in person by visiting any IRS Taxpayer Assistance Centre in the US and most IRS offices abroad. Here, the IRS personnel will verify your documentation and forward the application for processing.
You can also apply for your ITIN through the use of an Acceptance Agent. Acceptance Agents are authorized by the IRS to facilitate the ITIN application process and to verify the applicant’s proof of identity and foreign status. The Acceptance Agent will review the documentation and the application for accuracy and completeness. The Acceptance Agent will then submit your Form W-7 ITIN application and any supplemental documentation to the IRS on your behalf. Though the IRS does not charge a fee for issuing the ITIN, an Acceptance Agent will most likely charge a fee.
The IRS processes ITIN applications within 6 to 10 weeks of receiving a completed application. Any errors made on the application will delay the issuance of your ITIN. The successful ITIN applicant will receive a letter from the IRS assigning the ITIN and providing guidelines as to the use of the number. As the ITIN is only a tax processing number, it should not be confused with the Social Security Administration nor is it connected to any Social Security benefits.
There have been a few bogus requests over the past few years from organizations either claiming to be associated with the IRS or actually representing themselves as the IRS and requesting the personal information required to obtain the ITIN. Always check with your MNP Tax professional to ensure the request you receive is a valid one.
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