Sunday, 30 December 2012

New tax processing number rules to impact NRIs heading to US


Beginning January 1, 2013, the IRS will implement improvements to the Individual Taxpayer Identification Number (ITIN) application process. These changes will impact individuals who have recently moved to the US or who plan to move in the near future.
"The objective of these changes was to prevent fraudulent transactions. The IRS noticed an increase in fraudulent claims of certain provisions such as child tax credits and hence
introduced these new stringent requirements. As a result, this will impact all immigrants," explains Roy Vargis, an Illinois based CPA and promoted of www.IndianCPA.com.

Let us look at these changes and their impact.
What is an ITIN?
ITIN is a tax processing number issued by the Internal Revenue Service (IRS).
When does one need an ITIN?
IRS issues ITINs to individuals who are required to have a US taxpayer identification number but who do not have, and are not eligible to obtain a Social Security Number (SSN). Some examples:
-You have arrived in the US on a visa that does not permit your dependent spouse to work (for instance H1). However, there are certain benefits such as increased standard deduction and personal exemption if you file your taxes as 'Married Filing Jointly'. But in order to file such, your spouse would need an ITIN.
-If you have moved to the US and your spouse is still in India, you will still be able to claim your spouse's personal exemption in your tax return. However in such cases too, your spouse will need an ITIN.
-If your dependent spouse has foreign financial assets and foreign income such as interest or dividends from foreign securities, she must declare them in the US and pay taxes thereon. She would need to file a tax return and would hence need an ITIN.
-You have come to the US with your children who are not eligible for a SSN. However, if you want to claim their personal exemptions on your tax return as well as child tax credits, you would need to get an ITIN for them.
-If you are a non-resident of the US but you received certain payments on which tax was deducted at source, you would need a ITIN in order to claim a refund of the same.
-Apart from tax purposes, you would need an ITIN (in case you are not eligible for a SSN) if you are applying for a credit card or a mortgage.
What is the new procedure for getting an ITIN?
In order to see what has changed, let us look at the earlier rules. In order to get an ITIN, all you needed to do was submit, along with your tax return and form W7, notarized copies of certain documents such as a passport, visa, birth certificates, schools records etc. The ITIN would be issued with 4-6 weeks.
However, now the documentation requirement has become far more stringent. Here are the new requirements:
- You would now be required to send across the originals of these documents to the IRS.
- Instead of submitting the original documents directly to the IRS, you can approach a Certified Acceptance Agent. These agents will issue a 'certificate of accuracy' of your documents and you can then submit only the certificate to the IRS instead of the original documents. You can find a list of agents here. "However, in case of documentation for children, you would still need to submit originals to the IRS. For instance, in case of children below the age of 6 you would need to send the original medical records and for older children, the original school records," says Vargis, who is also an IRS Certified Acceptance Agent for ITIN.
 
- The ITIN would expire in 5 years after which you would need to follow renewal procedure
"While these changes will have an impact on all those coming to the US, it will be more significant for non-resident aliens and non-resident spouses. Persons resident in India who want to claim a refund on tax withheld in the US as well as US residents who want to claim benefits of their spouse who resides in India will now have to follow increased process. Earlier, these persons could submit a certificate in the form of an 'apostille' from agents in India. Now they too must either submit original documentation or 'certificate of accuracy' from the Certified Acceptance Agent. And in order to issue the certificate of accuracy, the acceptance agent will require to see original documents such as passport," Vargis explains.
Currently, while the IRS has appointed acceptance agents in several overseas countries, India does not have any. So those living in India who want to get an ITIN would need to send their original documents, either to the IRS directly or to the acceptance agent in the US.
Exception: Certain categories of people would be exempt from this new documentation procedure. This includes Nonresident aliens applying for ITINs for the purpose of claiming tax treaty benefits. "For instance, if a person resident in India has investments in the US and would like to claim a lower rate of tax on interest as per the India -US tax treaty, he would not need to go through the new documentation procedure. He can attach notarized copies of his documents and send it along with his W7 and tax return," Vargis explains.
What happens to ITIN already in effect?
"The IRS has not yet announced the impact of these new rules on ITINs already in effect. But it does appear that these ITINs will expire and renewal processes will come into effect," Vargis concludes.

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