The Individual Taxpayer Identification Number (ITIN) was created to ensure that non-U.S. residents and other individuals who do not have, and are not eligible to obtain, a Social Security number can pay the taxes they are legally required to pay.
The application process can take a significant amount of time and requires documentation that may be difficult to obtain.
The good news is an ITIN does come with some benefits, says Stephen Rickert, CPA, a Partner in the International Tax Services Group at RBZ.
“It can lower withholding taxes on interest and dividends paid to the nonresident,” Rickert says. “It can also be used to track withholding payments made on behalf of those nonresidents, to file U.S. and state tax returns and to receive refunds. The IRS won’t refund any excess taxes without an ITIN or a Social Security number.”
An ITIN holder is not eligible for Social Security benefits or the earned income tax credit. However, if that person becomes eligible for Social Security in the future, the earnings reported with an ITIN may be counted toward the amount he or she is eligible to receive.
Smart Business spoke with Rickert about ITINs and what business owners should know about them.
Why are ITINs necessary?
An ITIN is formatted in the same manner as a Social Security number and is used for federal tax reporting only.
It is not intended to serve any other purpose. The IRS issues ITINs to help individuals comply with U.S. tax laws and to provide a means to efficiently process and account for tax returns and payments for those not eligible for Social Security numbers.
The number does not authorize work in the U.S. or provide eligibility for Social Security benefits or the earned income tax credit. ITINs are geared for nonresidents who have income from the U.S. from passive investments in the U. S. such as from real estate or other U.S. businesses.
It’s a tool for the IRS, which needs to track the individual’s U.S. income and payment history and can’t effectively do so via just a name.
What makes getting an ITIN difficult?
Since 2012, the IRS requires ITIN applicants to provide either original documents such as passports, ID cards, and birth certificates or certified copies to accompany the ITIN application. Notarized copies are not acceptable.
A certified document is one that the original issuing agency (i.e. a foreign country’s agency which issues passports) stamps with that agency’s official seal. Applicants must visit their home country’s embassy, consulate or other agency that is responsible for issuing passports, which obviously can become quite time-consuming.
How did the IRS make the process easier?
The IRS has allowed certain Certified Acceptance Agents (CAAs) to verify on behalf of the IRS the authenticity of underlying documentation required to be submitted with the ITIN application. So instead of being required to travel overseas to obtain this verification, it can be gained through a CAA, either through face-to-face or live video interviews.
Firms go through mandatory IRS training and background checks to gain this endorsement. Once it’s complete, the IRS will accept certifications from these firms.
What do business owners need to know?
If you have non-U.S. investors, whether you are a corporation, a partnership or a limited liability corporation, you need to be aware that these investors will be pulled into the U.S. and/or state tax systems and be required to obtain ITINs.
You are required to comply with the tax withholding and reporting obligations on payments made to non-U.S. investors. ITINs are required for withholding. To facilitate this process, you should advise your investors to obtain these ITINs in advance of receiving any funds from the investment to avoid any unnecessary withholding.
Advise individuals to get at least three copies of everything to protect themselves against documents being lost in transit. The process can be cumbersome, so it’s best to only have to go through it once. ●
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