H. Jacob Lager

Foreign partner? Read this.

In IRS regulations on July 5, 2012 at 8:16 am

On June 22, IRS announced new changes to its procedures for issuing individual taxpayer identification numbers (ITINs).

So, what’s an ITIN?

ITIN literally stands for Individual Tax Identification Number.  As you likely know, every taxpayer who reports US income needs some kind of identifying number.  For individuals who are US citizens or resident aliens, that’s typically a social security number.  For business entities, that number is typically an Employer Identification Number (EIN).

An ITIN fills the same function for foreign individuals.  ITINs are typically required when a US payor intends to transfer, and withhold US taxes from, US-source income to a foreign individual.  The ITIN is the tracking mechanism that ensures the foreign person is paying his or her US tax liability.  Generally, a US withholding agent will require that its foreign payee obtain an ITIN before issuing payments abroad.  Such withholding agents often include US LLCs or partnerships or employers who hire temporary workers from overseas.

Obtaining an ITIN used to be a fairly painless operation involving a simple form application.   After 9/11, the Service tightened procedures for obtaining ITINs so as to prevent their abuse by international criminals seeking to move illicit funds.

So what’s changed?  As of last week, the IRS has announced that ITINs will only be issued to applicants who submit original identifying documents (like a passport or birth certificate) or copies of those documents certified by the issuing agency.  Notarized copies of those documents will no longer be accepted.

In other words, you need purple ink.

If you or your client is a new US business with individual foreign investors, or if you anticipate bringing in foreign talent to your US business for a short period of time, you may encounter these new rules.  Obtaining an ITIN. Can be tricky since the Service prefer that the foreign national actually submit the application concurrently with the person’s first US return.  This somewhat backward time frame can be particularly annoying for US partnerships seeking to issue K-1s to their foreign partners in advance of April 15.

When this kind of administrative Gordian Knot needs cleaving, that’s a good sign your client might need tax counsel.

  1. One more hurdle when trying to do business. Obviously, the government is “cracking down” on foreign workers. However, they’re hurting business owners and missing out on tax revenues in the meantime.

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