The Internal Revenue Service’s processes for assigning Individual Taxpayer Identification Numbers don’t always manage to identify fraudulent or incomplete applications, according to a new report.
The report, from the Treasury Inspector General for Tax Administration, estimated the IRS erroneously issued 8,116 ITINs because the agency’s tax examiners didn’t always make sure the required supporting documentation was included with applications. On top of that, TIGTA found that 8,110 ITINs that had been revoked were still valid on the IRS’s Individual Master File. In addition, another 687 ITINs were assigned to deceased individuals, but the dead person’s account wasn’t locked to prevent their identity from being used to file a tax return. Furthermore, TIGTA found the IRS’s processes don’t sufficiently reduce the risk associated with Certified Acceptance Agents’ verification of identity and foreign status of ITIN applicants.
The IRS issues ITINs to people who are required to have a Taxpayer Identification Number for tax purposes but don’t have and aren’t eligible to get a Social Security Number. They are often issued to undocumented immigrants, for example. The Protecting Americans from Tax Hikes Act of 2015, also known as the PATH Act, made several changes to the ITIN program. It codified the deactivation of unused ITINs, established the term for when ITINs are valid, and called for maintaining a program for training and approving community-based Certified Acceptance Agents, who help ITIN applicants and the IRS authenticate ITIN applicants' identities by reviewing and validating certain approved identification documents.
The PATH Act also required the IRS to do a study of the effectiveness of ITIN program and its effect on the ITIN application process. The law also required the IRS to distinguish between ITINs that were issued solely for purposes of claiming tax treaty benefits and ensure they're used only for that purpose.
in the report, TIGTA found the IRS didn’t provide an ITIN study to Congress in December 2017 as required by the PATH Act. TIGTA also found the IRS has not established processes as required under the PATH Act to make sure ITINs issued for tax treaty purposes are only used for that purpose. TIGTA determined that as of March 11, 2017, only 2,869 (5.3 percent) of the 54,294 ITINs that were issued for tax treaty purposes and used on a Tax Year 2014 through 2016 tax return were actually used to claim a tax treaty benefit.
TIGTA also found improvements are needed to Real-Time System consistency and validity checks so the IRS can better identify potentially erroneous or fraudulent applications for review. As a result, TIGTA found the IRS may have issued 151,384 potentially erroneous or fraudulent ITINs. On top of that, the IRS hasn’t made a programming change to the Real-Time System that could help it more effectively identify potentially fraudulent applications. Tax examiners use the Real-Time System process, assign and record applicant submissions.
TIGTA made 17 recommendations in the report, but because of the passage of the Tax Cuts and Jobs Act of 2017, it withdrew one of its recommendations. IRS management didn’t agree with one recommendation complying with the law on implementing processes to make sure ITINs are issued only for claiming tax treaty benefits. The IRS agreed and proposes corrective action for the other 15 recommendations.
“We agree with the report’s findings that not all applications were processed correctly; however, we think it is important to highlight that, when reviewed inversely, the results show a very high accuracy rate for processing applications,” wrote Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report.