This article first published by the Canadian Tax Foundation in volume 12, number 2 Canadian Tax Highlights.

IRS Tightens Process for Obtaining ITINs. The IRS recently announced in Notice 2004-1 that it has tightened the eligibility requirements for individual taxpayer identification numbers (ITINs) to help eliminate their nontax use. Effective immediately, a taxpayer who is not eligible to obtain a social security number can no longer obtain an ITIN from the IRS without simultaneously submitting the original completed income, estate or other return for which the ITIN is needed along with Form W-7 (Application for IRS Taxpayer Identification Number), which has been revised. To avoid any similarities to a social security card, the IRS has changed the appearance of the ITIN certificate from a card to a letter.

Generally, U.S. social security numbers must be used as taxpayer identification numbers except for children in the process of being adopted and non-U.S. persons who are required to obtain ITINs in lieu of social security numbers. A large percentage of ITINs are issued to non-U.S. workers who are ineligible for social security numbers.

The IRS has discovered that individuals are using ITINs as proof of identity for nontax purposes. Individuals apply for ITINs without any intention of filing returns. Instead, they present ITINs in lieu of social security numbers when applying for drivers’ licenses. Individuals are also using ITINs to establish identity for health and welfare benefits and for employment purposes.

Forms W-7 now must be accompanied by an original, completed return. The IRS will not accept Forms W-7 submitted in advance of returns. Taxpayers should not send their returns and Forms W-7 to the mailing address designated on the applicable income tax return instructions. Rather, the return and Form W-7 should be filed with the IRS office specified in the instructions to Form W-7. The return will be processed in the same manner as if it were filed at the service center specified in the return instructions.

There are, however, certain exceptions to the requirement that a completed return be filed with the Form W-7. These exceptions are described in detail in the instructions to the revised Form W-7. One of the exceptions applies to holders of financial accounts generating income subject to information reporting or withholding requirements. In these cases, an applicant for an ITIN must provide the IRS with evidence that the applicant opened the account with the financial institution and has an ownership interest in the account.

The IRS has also streamlined the number of documents it will accept as proof of identity before it issues an ITIN. Previously, the IRS accepted 40 documents as proof of identity. Now, it will only accept 13. They include an original passport (or a notarized or certified copy of a valid passport), national identification card, birth certificate, and military identification card. If an individual does not have a passport, the IRS requires two or more types of secondary identification.

It has come to the author’s attention that since the IRS has issued this Notice, it is no longer processing applications for tax identification numbers for U.S. business entities (Employer Identification Numbers (EINs)) where the entity has strictly non-U.S. officers unless one of the officers first applies for and obtains an ITIN. This application process is currently taking between 4-6 weeks. In the past, a photocopy of the non-U.S. officer’s passport or driver’s license was submitted with the EIN application and the officer was not required to obtain an ITIN even though the instructions to the EIN application indicated that an ITIN was required. The EIN was previously obtained usually within only 1-2 days.

IRS to Examine Foreign Corporations’ Tax Forms. A senior IRS official recently indicated that the IRS will examine certain filings by non-U.S. corporations to determine whether further enforcement measures are necessary.

The IRS will examine Forms 1120F (U.S. Income Tax Return of a Foreign Corporation) and 8833 (Treaty Based Return Position Disclosure), filed by foreign corporations, looking especially for permanent establishment (PE) and withholding tax issues and problems associated with foreign companies taking treaty-based tax positions, said Elvin D. Hedgpeth, acting director (international) of the IRS Large and Midsize Business Division. Hedgpeth, at a meeting of the District of Columbia Bar Association Tax Section, indicated that the results of the examination may lead to further enforcement or compliance measures.

Foreign corporations usually are not required to pay federal income tax on their business operations if they are not engaged in a U.S. trade or business or are resident in a U.S. treaty-partner country (such as Canada) and do not have a U.S. PE. Under Section 882 of the Code, a foreign corporation must file a true and accurate return in order to receive the benefit of any deductions or credits allowed to it under the Code. Some foreign corporations file "protective" tax returns using Form 1120F to ensure they are not denied the benefit of tax deductions and credits under the Internal Revenue Code ("Code") if they are later found by the IRS to have been engaged in a U.S. trade or business or to have had a U.S. PE.

Foreign corporations also are required to file Form 8833 if they are taking the position that they are engaged in a U.S. trade or business but do not have a U.S. PE and, therefore, do not have a U.S. net federal income tax obligation.

Leslie R. Kellogg is a member of Hodgson Russ LLP’s General/International Tax and International/Cross-Border Practice Groups. Ms. Kellogg regularly counsels clients on advantageous business structures for tax and estate planning purposes.

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