New Pre-Tax Return ITIN Applications

by Paula N. Singer, Esq. 

The Internal Revenue Service (IRS) issues individual taxpayer identification numbers (ITINs) to individuals who have a U.S. tax administration purpose requiring a taxpayer identification number (TIN) but who are not authorized to work in the United States and, therefore, are not eligible to obtain a Social Security number (SSN).

On December 17, 2003, the Internal Revenue Service announced tighter procedures for issuing ITINs, focusing primarily on the federal tax administrative requirement for filing a U.S. tax return. As a result, the original Form W-7 instructions ignored a number of other tax administrative purposes requiring a TIN. New Form W-7 instructions issued in January 2007 rectify some of these lapses (the instructions did not address state tax administrative process requirements for a TIN either time).

Income Tax Treaty Claims

IRS tax rules require recipients claiming exemption from withholding on U.S.-source income under an income tax treaty (other than income from publicly traded investments or income related to loans of certain securities) to submit to the payer prior to payment a withholding certificate that includes a TIN. Two categories of treaty-exempt income of nonresident aliens require such a withholding certificate.

1. U.S.-source fixed or determinable annual or periodic income (called "FDAP income") such as rents, royalties, certain interest, gains, gambling income, prizes and awards (Form W-8BEN required). When the proper amount of tax is withheld on FDAP income (30% or a reduced rate under a tax treaty), no U.S. tax return filing is required if this is the payee’s only U.S.-source income.
2. Income effectively connected to a U.S. trade or business (called "ECI") such as income from personal services, employment or self-employment, (Form 8233 required) and scholarships and fellowships paid to or on behalf of recipients in F, J, M, or Q immigration status (W-8BEN required). Recipients of such treaty-exempt income frequently fail to submit a tax return because they have never been informed of the requirement.

In the event that the payee of either type of income is a U.S. resident for tax purposes, a treaty-annotated Form W-9 is required instead of a Form W8-BEN or 8233. Note that U.S. residents are generally not eligible for treaty benefits on FDAP income or self-employment income under treaties.

Form W-7 instructions include the following exceptions for these two income categories:

FDAP Income: Exception 1: Passive Income now provides generally that individuals claiming tax treaty benefits for an exemption from, or reduced rate of, withholding on passive income may submit evidence on the Form W-7 application that they are entitled to claim tax treaty benefits.

ECI: Exception 2: Other Income now provides that an individual claiming tax treaty benefits for an exemption from tax on income from non-compensatory scholarship and fellowship grants may submit evidence of the treaty exemption. Such evidence includes:

• A copy of the Form W-8BEN submitted to the withholding agent
• A letter or official notification from the educational institution (college or university) awarding the scholarship or fellowship grant

Exception 2 instructions also expand on the procedures included in the prior Form W-7 instructions for treaty-exempt claims. The instructions indicate that recipients of treaty-exempt honorarium payments submit with their Form W-7:

• A copy of the completed withholding agent’s portion of Form 8233
• A letter from an authorized school official at the institution making the honorarium payment
• A letter requesting the recipient’s presence for a speaking engagement
• Evidence on the Form W-7 application displaying the name of the college, university or educational institution

Other instructions with the Form 8233 exception may be helpful for individuals authorized to be employed in the United States who are not in the U.S. long enough to obtain an SSN.

Information Reporting

U.S.-source taxable scholarship and fellowship grants of nonresident aliens are subject to withholding at either a 14 percent or 30 percent rate. The income and taxes withheld must be reported on Form 1042-S. Under the prior Form W-7 instructions, grant recipients were unable to obtain a pre-tax return ITIN. As a result, recipients of such taxable grants had to submit a Form 1042-S lacking a TIN with their tax return and ITIN application to the ITIN Unit. Such recipients who had already left the United States failed to do so because processing from abroad was either too costly or too difficult, or both.

The new instructions include such recipients of grants under Exception 2. Evidence required to be submitted includes:

• A letter from the Designated School Official (DSO) or Responsible Officer (RO), on official letterhead, stating that they are receiving income from scholarship or fellowship grants subject to tax withholding and information reporting requirements
• A letter or official notification from the educational institution awarding the scholarship or fellowship grant
• Evidence on the Form W-7 application displaying the name of the college, university or educational institution

Under Exception 2, F, J, M, and Q grant recipients who are not employed are not required to first apply for an SSN. However, they must submit a letter from their DSO or RO stating that they will not be securing employment in the U.S. or receiving any type of income from personal service. (A strict application of this wording could preclude obtaining an ITIN for treaty exempt grants in years prior to securing employment if the likelihood of future employment were known to the DSO or RO).

Exception 1 clarifies that resident alien bank account holders may apply for a pre-tax return ITIN. Generally, only nonresident aliens with bank account interest related to a U.S. trade or business, such as a U.S. rental property, may apply for a pre-tax return ITIN. Other nonresidents lack a tax administrative purpose for such an ITIN because their bank account interest is not subject to withholding, reporting, or taxation. Such a restriction will prevent nonresidents from opening a bank account in banks that require a TIN to open an account. The IRS is aware that many banks who are also certifying acceptance agents have been erroneously submitting W-7s for foreign nationals in this situation, and indicated in October of 2006 that they may be scrutinizing such behavior in the future.

Paula Singer, Esq., Co-founder and Chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer LLP, Newton, MA, has over 25 years of experience providing advice and compliance services to individuals and their employers, and payers on cross-border matters.

Watch for Volume 4, Number 4 for a discussion on “J-1 Exchange Visitors: Resident or Nonresident.”

Q: Does an honorarium recipient need a taxpayer identification number (TIN)?

Save the Date: Summer Nonresident Alien Training Workshop July 31^st to August 3^rd

Windstar will hold its Summer Nonresident Alien (NRA) Training workshop Tuesday, July 31st through Friday, August 3rd at the Boston Newton Marriott in Newton, Massachusetts. Windstar’s experts will provide substantive training on immigration rules related to paying foreign nationals, determining tax residency, the special withholding and reporting rules for wages, scholarship and fellowship grants that apply to nonresidents, and exemptions from tax under the law and treaties. Included will be an update on the latest ITIN application rules. All workshop participants will also receive hands-on training on International Tax Navigator®.

Paula Singer Featured as Speaker in “Promoting Global Mobility: Tax and Immigration Strategies” Seminar

Paula N. Singer, Esq. served as a featured speaker for the “Promoting Global Mobility: Tax and Immigration Strategies” seminar presented by Boston area law firm Fragomen, Del Rey, Bernsen & Loewy, LLP in conjunction with Vacovec, Mayotte, and Singer, LLP. The seminar, designed for professionals who handle global talent management and relocation programs, educated attendees on the strategies to ease tax, payroll and immigration issues related to transferring employees internationally.

Paula Singer’s “Top 10 U.S. Tax Return Errors by Foreign Nationals” Featured in The Federal Tax Alert

The Federal Tax Alert, the monthly publication of the National Society of Tax Professionals, featured Paula N. Singer, Esq.’s article on “Top 10 U.S. Tax Return Errors by Foreign Nationals” in their April, 2007 edition.

Windstar Will Dock at These Upcoming Trade Shows and Seminars

NAFSA 2007 Annual Conference
May 27 – June 1, 2007
Minneapolis Convention Center
Minneapolis, MN

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New England Payroll Conference
June 6 – 8, 2007
Sheraton Nashua Hotel
Nashua, NH

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HFMA ANI Conference
June 24-27, 2007
San Diego Convention Center
San Diego, CA
Booth Number 1521

©Copyright 2007 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication.  While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.

Since 1995 educational institutions, hospitals, research institutions, and corporations have relied on Windstar Technologies, Inc. to deliver the expertise to comply with the U.S. tax residency rules, tax rates, and special tax exemption rules under the law and U.S. treaties.  When government agencies require information about foreign nationals in the workplace, Windstar provides straightforward analysis and reporting.  Comprehensive software for analysis and reporting, expert knowledge, and unparalleled customer service combine to make Windstar the first choice for nonresident alien tax compliance.