April 13, 2006
By Blaire Borthayre
An estimated twenty million immigrants in the United States are not eligible to obtain a social security number. However, many of these same individuals pay taxes on income and are obligated to file tax returns. If this sounds confusing to you, then you are not alone.
The IRS states that “ITIN’s (Individual Taxpayer Identification Numbers) are issued to help individuals comply with U.S tax laws, and to provide a means to efficiently process and account for tax returns and payments for those not eligible for Social Security Numbers.” Thus if your client has to file a tax return and does not qualify for a social security number, then they would need to do so with an ITIN.
In December 2003, the IRS changed the regulations regarding the issuance of the ITIN. Prior to this date, an individual could simply fill out a W-7 form and mail it to the IRS along with two documents proving identity and foreign status. An ITIN would then be issued to the taxpayer in six to eight weeks.
Since the changes were implemented in 2003, an ITIN can only be issued if the taxpayer satisfies one of the tax treaty requirements such as filing a tax return, opening an interest bearing account or Disposition of U.S Real Property. The most frequent method is through tax preparation.
Subsequently tax preparation companies have been caught off guard by the lack of information and training about their new role in the process. The instructions that accompany the W-7 application form are not all inclusive and can be confusing. Many tax companies will not work with ITIN clients, as they are unfamiliar or unaware of the processes involved. Other offices have plunged into the ITIN market after seeing the lucrative numbers of clients in need of assistance. However, this has backfired as ITIN rejections result in lengthy delays as well as serious liability for clients who are not working with knowledgeable preparers.
For instance, immigrants who are not legally able to work in the United States often purchase invalid social security cards. This is not a stolen number but rather a number that does not exist in the system. As long as the employer does not verify the number with the Social Security Administration, the individual is often able to use it to obtain employment. At the end of the year, the employee is issued a W-2 with the invalid number and will often simply throw it away thinking that they cannot file taxes. If he tries to present the W-2 to an untrained tax office, he will be turned away through an IRS rejection due to the invalid number.
Many of the immigrants fear filing because they do realize that the IRS does not communicate with immigration..
ITINS are very useful as clients can open bank accounts and obtain home and car loans with mainstream lenders. These lenders typically require that two years of tax returns accompany the credit application. Clients can also obtain an EIN with an ITIN. Thus they are highly sought after and clients pay between $50 and $250 for one ITIN.
However, the most critical issue at the moment is immigration reform. The bill passed by the Senate Judiciary Committee included the earned legalization provisions within Title VII of the Secure America and Orderly Immigration Act. Under SAOIA, undocumented immigrants who were working in the U.S. on January 7, 2004 could qualify for temporary lawful status for 6 years if they pay a $1,000 fine and fees, to qualify, the Hispanic immigrant must have proof of having paid all back taxes in addition to undergoing a background check. This can only be done with an ITIN.
On April 6th and 7th, the Senate voted against efforts to move forward on three separate immigration reform proposals due to a lack of ability to come to agreement and is currently on a two week break. The final outcome is still unknown but most predict a compromise in this election year.
Offices who specialize in Hispanic tax issues such as Liberty Tax Service have noted a surge in Hispanic immigrant customers in the past week. John Hewitt, CEO, of Liberty, attributes that to their innovative program of providing training to all franchisees in bilingual hiring, culture, tax law affecting immigrants and ITIN preparation. After passing the training courses in these topics, franchisees submit ten ITINS applications for examination and approval by the corporate office before they are forwarded to the IRS. Afterwards, the franchisees become certified in Hispanic tax preparation and then provide free ITINS for Hispanic customers.
This surge is predicted to quickly become a stampede over the next month as word travels quickly in the immigrant community. Waiting until the bill passes to file taxes and get the ITIN could cost him his slot as there is sure to be a long line of people waiting to apply for the opportunity to work and be legal for up to six years.
The other problem is that many offices are shutting down this time of year. Tax preparation in the Hispanic community is year round as it involves reaching and educating clients who may not have filed for years since they were unaware of the possibility or could not find an office to help them.
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With eleven million undocumented Hispanics in the United States and so few tax preparation offices fully trained to serve them, the sky is the limit for those who are ready to learn.
Blaire Borthayre is a Hispanic marketing consultant and the author of three books including “A Tax Preparer’s Guide: Everything You Ever Wanted to Know About ITINS”, “Marketing to the Hispanic Community: A Comprehensive Guide for Tax Preparation Offices and “Working Effectively with Hispanic Clients. www.trainingresourceclinic.com
Great article. Good look at the dilema of illegal immigrants and taxes. Keep it up.
Posted by: Josue Sierra | April 17, 2006 at 08:09 AM