TIGTA: IRS unable to detect ITIN fraud; AICPA urges changes

November 1, 2012

IRS management created an atmosphere that discourages tax examiners from identifying potentially fraudulent applications for individual taxpayer identification numbers (ITINs), the Treasury Inspector General for Tax Administration reported in August (TIGTA Rep’t No. 2012-42-081).

ITINs allow individuals who are not eligible for Social Security numbers to obtain an identification number for tax purposes. TIGTA reported that in 2011, the IRS processed more than 2.9 million ITIN tax returns resulting in tax refunds of $6.8 billion.

TIGTA audited the ITIN program after members of Congress referred complaints from IRS employees regarding the management of the ITIN program. The complaints alleged that IRS management was not concerned about addressing questionable applications and was interested only in the volume of applications that could be processed, regardless of whether they were potentially fraudulent.

TIGTA’s review substantiated many of the allegations in the IRS employees’ complaints. It found procedures for documentation and review of ITIN applications were lax, with a danger of ITIN-related tax fraud going undetected. In particular, TIGTA found that IRS management eliminated successful processes used to identify questionable ITIN application fraud patterns and schemes. The processes and procedures it did use were inadequate to verify each applicant’s identity and foreign status, TIGTA said.

TIGTA recommended that the IRS develop more detailed procedures and deliver adequate training on reviewing documentation supporting ITIN applications to identify questionable documents. It also recommended that the IRS expand the quality review process to include adequate emphasis on whether employees are accurately identifying fraudulent documents and that it revise the criteria for identifying questionable applications.

The IRS agreed with most of the recommendations and has announced plans to implement interim changes based on TIGTA’s findings. One recommendation was that the IRS require only original documents or documents certified by the issuing agency to be provided in support of an ITIN application. The IRS addressed that recommendation in June when it announced it would stop issuing ITINs unless the applicant furnishes original documents or certified copies from the issuing agency with Form W-7, Application for IRS Individual Tax Identification Number (News Release IR-2012-62; see previous Tax Matters coverage, “Original Documents Now Needed for ITINs,” Sept. 2012, page 70). Notarized copies not certified by the issuing agency will not be accepted. The IRS also announced in June that Certifying Acceptance Agents (CAAs) must send the documents to the IRS rather than, as formerly, review them and certify to the IRS that they are authentic, complete, and accurate. For the IRS’s frequently asked questions on the procedures, see tinyurl.com/99btzxd.

The AICPA urged the IRS to consider the effect of the tighter documentation procedures on ITIN taxpayers and to reconsider its disallowance of notarized copies. The chair of the AICPA Tax Executive Committee, Patricia Thompson, also requested immediate guidance on the changes in an Aug. 28 letter to IRS Commissioner Douglas Shulman.

Thompson noted that the IRS has indicated it may take 60 days or longer to return the documents to applicants, which could cause a hardship, especially with passports, a common form of verification. Certified copies may be difficult or impossible for applicants to obtain. “We have also heard from our members that some prospective ITIN applicants who are currently residing in the United States have been advised by their home country’s consulate that it does not issue certified copies of passports,” Thompson wrote.

Thompson also urged the IRS to continue to allow CAAs to certify identification documents. CAAs can help mitigate tax fraud and are “essential” for applicants who live overseas or in remote locations, she wrote.

The letter also suggested the IRS underestimated the number of applicants affected by the change, pointing out that although the normal filing deadline for individuals for the 2011 tax year had passed, the automatic extended due date of Oct. 15, 2012, had not. Many applicants file on extension because they have filing obligations in multiple jurisdictions and/or need extra time to satisfy the substantial-presence test of Sec. 7701(b), Thompson wrote.

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