Every year, the IRS advises taxpayers to e-file their returns to avoid processing delays during the filing season. This year, the IRS states that now more than ever, e-filing is the safest and best way to file a return and ensure timely payments of refunds. During the COVID-19 pandemic, taxpayers have faced extreme delays and hardship caused by the IRS’s delay in processing their paper returns. As of April 2, 2021, the IRS still had nearly 16 million paper returns waiting to be processed, including about a third that were received in calendar year 2020. Despite the extreme burden taxpayers face when they file paper tax returns, there is one group of individuals who generally cannot e-file: taxpayers who need to apply for a new Individual Taxpayer Identification Number (ITIN).
An ITIN is a nine-digit number issued by the IRS to taxpayers so they can comply with the U.S. tax laws. Taxpayers need an ITIN if they are required to file a tax return or have a reporting requirement, and they do not have and are not eligible to receive a Social Security number (SSN). ITINs are required not only for primary taxpayers filing returns, but also for other persons included on a return who do not have SSNs, such as spouses and dependents. Taxpayers use their ITINs to file their tax returns, pay the tax they owe, and claim any tax benefits to which they are entitled under the law. In tax year 2019, the IRS received over two million returns with the primary taxpayer using an ITIN, with total tax computed after credits of approximately $2.8 billion. For the same tax year, the IRS received about 544,000 returns filed by primary taxpayers with an SSN and a secondary taxpayer with an ITIN. These returns reported over $3 billion in tax after credits were applied.
Individuals apply for an ITIN by filing Form W-7, Application for IRS Individual Taxpayer Identification Number, which asks for details about why the ITIN is needed and requires sending in certain documents to prove identity, foreign status, and residency. Generally, taxpayers applying for a new ITIN must apply with their first tax return, which must be filed as a paper return, not electronically. There are some exceptions, however, when you may be able to apply for an ITIN without also submitting a tax return – generally, when you’re claiming the benefits of a tax treaty, or when third parties (like a bank or other financial institution) need your ITIN for their reporting. These exceptions do not apply to the vast majority of ITIN applicants.
The policy of requiring an ITIN application with a paper tax return is driven by a concern that taxpayers must demonstrate a tax filing obligation to receive an ITIN; otherwise, taxpayers could obtain and use ITINs for purposes outside of tax administration. However, Congress already addressed this concern by passing a law requiring the deactivation of any ITINs assigned to individuals who do not file a federal tax return and are not included as a dependent on another taxpayer’s federal tax return for three consecutive years. As TAS has been recommending for years, the IRS has other options for taxpayers to prove a tax return filing requirement and could allow taxpayers to do so throughout the year. For example, a taxpayer could prove a filing requirement by submitting wage documents from an employer and request the ITIN prior to the filing of his or her return.
During 2021 through March 27, the IRS had received over 150,000 ITIN applications, with over 125,000 submitted with a tax return. This number is expected to grow – in 2020, the IRS received over a million ITIN applications, including about 470,000 applications from new applicants, meaning they had to apply with a paper tax return if they did not meet one of the narrow exceptions. These taxpayers are facing a double-whammy this filing season – first, the delay in having an ITIN application processed and second, the delay in having a paper tax return processed. For the week ending March 27, 2021, ITIN applications submitted with a return were taking 25 business days on average just to be input into the system. During this same week, the ITIN unit started with inventory of almost 67,000 applications to be worked and ended with an inventory of over 74,000, reflecting a growing backlog. Add the delays in obtaining an ITIN with the delays in having a paper return processed, and taxpayers entitled to refunds are left waiting months before payment.
Some ITIN taxpayers have children with SSNs and are eligible for the Child Tax Credit but must wait an extended time during the pandemic to receive much needed money for their children. Congress has introduced measures providing for more frequent Child Tax Credit payments, recognizing the urgency for parents to receive these payments right now. Yet, taxpayers with an SSN who need to file jointly with a spouse who needs an ITIN will also have to wait extended periods to receive a stimulus payment if they did not initially receive the Economic Impact Payments and need to claim the Recovery Rebate Credit on their paper returns. The COVID-19 pandemic has only exacerbated the problems for taxpayers who must wait during the filing season for an ITIN application to be processed (as opposed to applying before and having one ready when it is time to file) and wait again for a paper return to be processed.
The current procedures cause unnecessary delays, and the IRS should reconsider this policy. We recommend the IRS develop and implement a procedure prior to the next filing season that allows all applicants to apply for an ITIN throughout the year and submit alternative proof of a filing requirement other than an annual tax return. This change will prevent unnecessary delays, encourage voluntary compliance, and reward these individuals for doing the right thing by filing U.S. tax returns.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.