Tax refund fraud costs taxpayers billions of dollars each year. In an effort to curb fraud, the Internal Revenue Service has made a number of changes over the past few years, including new controls over Individual Taxpayer Identification Numbers (ITINs) which took effect in 2013. Those rules, however, are changing again.
ITINs are numbers assigned to taxpayers who are not eligible to obtain Social Numbers are generally assigned to U.S. citizens and those noncitizens who are authorized to work in the United States by the Department of Homeland (downloads as a pdf). Social Security Numbers and ITINs are intended to be used only for tax and benefits purposes but as banks, schools and insurance companies use them as identification numbers, more and more folks want them for non-tax purposes: only a quarter of ITINs assigned since the program began in 1996 have been used to file tax returns.
According to a 2012 study by the Treasury Inspector General for Tax Administration (TIGTA), the IRS was all too happy to comply with requests for ITINs without checking to make sure those requests were valid. As a result, TIGTA found significant potential for “the improper assignment of ITINs to individuals who have not substantiated their identity or foreign status.”
What does that have to do with fraud? Easy. Those looking to take advantage of the system seized on the idea that the sheer volume of assigned ITINs combined with the volume of tax returns processed has presented opportunities to cheat.
In 2011, TIGTA found that the IRS issued more than 2.9 million tax returns filed with ITINs requesting tax refunds of $6.8 billion. Not all of those refunds were fraudulent but many of the returns were associated with fraudulent behaviors. In many instances, those behaviors began with the ITIN application. TIGTA found, for example, that 154 mailing addresses were used 1,000 or more times on an ITIN application. Some addresses on ITIN applications were used in excess of 6,000 times, including an address in Phoenix, Arizona, which was used to assign 15,795 ITINs in one year.
According to TIGTA, the problem seems to revolve around lack of attention to the process. While reviewing data, TIGTA found that of the 1,638,737 ITINs assigned between January 1 and December 31, 2011, supporting documentation such as work papers and foreign status was certified by a Certifying Acceptance Agent only about a quarter of the time.
With fraudulent ITINs in hand, tax returns were then processed, issuing billions of dollars in refunds. Again, addresses went unchecked: four single addresses in Atlanta were used to process more than 40,000 refunds totaling more than $51 million dollars. In one case, a single bank account was used to direct refunds more than 8,000 times. More than $16 million in ITIN refunds were directed to just ten bank accounts.
As a result of concerns about tax refund abuse, including those involving ITINs, the IRS initially made two important policy changes:
Effective for the 2015 tax season, the IRS will limit the number of refunds electronically deposited into a single financial account (such as a savings or checking account) or prepaid debit card to three. Under the new rules, any subsequent refunds will be issued by paper check and mailed to the taxpayer; and
Beginning in 2013, ITINs were to expire after five years. Taxpayers could no longer hold onto them indefinitely and must reapply after the end of the term.
But just as quickly as the second policy change was announced – with little fanfare – the IRS has changed its policy governing the issuance of ITINs. Again. The second policy change has been eliminated:
Under the new rules , ITINs will not automatically expire so long as those who hold the ITINs file a tax return. But just one. The IRS will not allow an ITIN to automatically expire so long as it has been used on at least one tax return in the past five years.
The new rules will apply to all ITINs, regardless of when an ITIN was issued.
Under the old rules, those with ITINs had to reapply in 2018. Under the new rules, the IRS will begin deactivating unused ITINs in 2016. This allows taxpayers to file a return in 2015 (remember, you just have to file one) in order to retain a valid number.
It’s clear from the new rules – a change from the heavily criticized “interim” rules which were made permanent in 2012 – that IRS is still struggling with how to curb ITIN-related fraud. There’s no question that ITINs are being used for fraud. And there’s no question that ITINs are being snatched up by some of the more than 11 million immigrants in this country illegally (remember, ITINs are used for everything from banking to getting a drivers license). It’s worth remembering, however, that there are valid reasons to issue ITINs for those who are legitimately in the U.S. to work and pay taxes. Paying taxes is the part we want to encourage, right?
My guess is that these new rules are not the final say. I anticipate that we’ll see a flurry of the discussions about immigration and reform (emphasis on discussions rather than on reform) and that eventually, these rules will be tweaked again. For now, however, the newest change to the ITIN system is effective immediately.
