Reproduced with the permission of the Canadian Tax Foundation from, Leslie R. Kellogg, "IRS: Treaty Filings, ITINs" (2003) vol. 12, no. 2 Canadian Tax Highlights.

Canadian Tax Highlights
February, 2004

by Leslie R. Kellogg

IRS Notice 2004-1 recently announced that eligibility for individual taxpayer identification numbers (ITINs) has been tightened to help eliminate their non-tax use. Effective immediately, a taxpayer who is ineligible to obtain a social security number can no longer obtain an ITIN without simultaneously submitting the original completed income, estate, or other return for which the ITIN is needed along with (revised) form W-7 (Application for IRS Taxpayer Identification Number). To avoid confusion with a social security card, the ITIN certificate's format is now a letter, not a card.

Generally, an individual must use his or her US social security number as a taxpayer identification number, except for children in the process of being adopted and non-US persons who must obtain ITINs in lieu of social security numbers. A large percentage of ITINs are issued to non-US workers who are ineligible for social security numbers. The IRS discovered that individuals apply for ITINs without any intention of filing tax returns; they use the ITINs as proof of identity for non-tax purposes in lieu of social security numbers--for example, when applying for drivers' licences and to establish identity for health and welfare benefits and for employment purposes.

A form W-7 now must be accompanied by an original, completed return; the form is not accepted in advance of the return. The return and the form W-7 should be sent to the IRS office specified in the form's instructions, not to the mailing address designated in the return's instructions. The return is processed in the same manner as if it were filed at the service centre specified in the return's instructions. However, revised form W-7 details circumstances in which a completed return need not be filed with the form. For example, a holder of financial accounts generating income subject to information reporting or withholding requirements who is applying for an ITIN must provide the IRS with evidence that he or she opened the account with the financial institution and has an ownership interest in the account.

The IRS has reduced the number of documents it will accept as proof of identity before it issues an ITIN from 40 to 13, including an original passport (or a notarized or certified copy), national identification card, birth certificate, and military identification card. If an individual does not have a passport, the IRS requires two or more types of secondary identification.

It has come to our attention that since the IRS issued the notice, it no longer processes applications for tax identification numbers for US business entities (employer identification numbers, or EINs) if the entity has only non-US officers unless one of the officers first applies for and obtains an ITIN, a process that currently takes four to six weeks. In the past, a photocopy of the non-US officer's passport or driver's licence was submitted with the EIN application, and the officer was not required to obtain an ITIN even though the instructions to the EIN application indicated otherwise; the EIN process usually took only one to two days.

IRS to examine foreign corporations' tax forms. A senior IRS official recently indicated that the IRS will examine certain filings by non-US corporations to determine whether further enforcement measures are necessary. Forms 1120F (US Income Tax Return of a Foreign Corporation) and 8833 (Treaty-Based Return Position Disclosure) filed by foreign corporations will be examined by the IRS with a view to determining, in particular, any permanent establishment (PE) and withholding tax issues and problems associated with foreign companies taking treaty-based tax positions, said Elvin D. Hedgpeth, acting director (international) of the IRS Large and Midsize Business Division. At a meeting of the District of Columbia Bar Association Tax Section, Mr. Hedgpeth indicated that the results of the examination may lead to further enforcement or compliance measures.

Foreign corporations usually are not required to pay federal income tax on their business operations if they are not engaged in a US trade or business or if they are resident in a US treaty-partner country (such as Canada) and do not have a US PE. Under Code section 882, a foreign corporation must file a true and accurate return (form 1120F) in order to benefit from allowable deductions or credits, unless it neither has a US PE nor is engaged in a US business; but some foreign corporations file (so-called protective tax returns) to ensure that they are not denied such benefits should the IRS subsequently find them to have such a business or PE. Moreover, a foreign corporation that is engaged in a US trade or business without a US PE may be treaty-protected from US net federal income tax; the foreign corporation must file form 8833 to preserve such treaty protection against US taxation.