Thursday, February 2, 2023

April 2008 Legal Briefs

  1. “Local Check” Area Expanding on April 19
  2. Recent Court Ruling Concerning Liens on Indian Car Titles
  3. Using W-9s (With SSN or ITIN) or W8-BENs to Open Accounts

1. “Local Check” Area Expanding on April 19

The Federal Reserve Bank of Kansas City will stop processing checks for banks in Kansas and western Missouri.  These banks’ checks instead will be processed through Dallas, effective April 19, 2008. 

This change indirectly affects all banks in Oklahoma. (All banks’ checks processed through Dallas are considered “local” with respect to each other.)  There are eight new routing-code prefixes that Oklahoma banks must treat as “local” as a result of this change. The new “local” prefixes (previously considered “non-local”) are 1010, 1011, 1012, 1019, 3010, 3011, 3012, and 3019.  Banks should reprogram their systems to give “local” availability for checks with these prefixes.

The general rule in Section 229.12 of Regulation CC is that funds for “local” checks must be available for withdrawal “not later than the second business day following the banking day on which funds are deposited.”  For competitive reasons many banks (particularly in metro areas) are making funds available on the first following business day.

Since October 21, 2005, the “local” check region for Oklahoma banks has already included all of Oklahoma and Texas, as well as southern New Mexico and northern Louisiana.  Now Kansas and western Missouri are added, resulting in six states at least partly included in the “local” region for Oklahoma banks. 

If a bank is providing one-day availability for “local” checks and starts experiencing losses because of a somewhat longer return period for “local” checks drawn on banks outside of Oklahoma, one solution would be to split the bank’s funds availability for “local” checks:  “Local” checks from outside Oklahoma could be given credit not later than the second business day following deposit (as Section 229.12 requires), but deposits of “local” checks written on banks inside Oklahoma could result in funds availability on the first business day (faster than Section 229.12 requires).  This would require an amendment to a bank’s funds availability policy.

2. Recent Court Ruling Concerning Liens on Indian Car Titles

In the Wilserv case, the 10th Circuit Court of Appeals decided in January that a lender cannot perfect a security interest in a vehicle by filing a lien on a Muscogee (Creek) Nation car title.  The good news is that a loan to purchase a consumer-purpose vehicle with a Creek title should still give the lender an automatically perfected purchase-money security interest in consumer goods under Oklahoma’s UCC.  (The lender is protected in bankruptcy.)

The unusual fact in the Wilserv case is that it was a “refinance” loan.  (The lender lost its collateral, because (1) the loan did not create a purchase-money security interest, and (2) the lender’s lien filing on the title was not effective to perfect a security interest.)  Here is the problem:  The Creek Nation has a procedure for recording liens on car titles, but they have no law stating that filing a lien on a Creek car title will perfect a security interest.  In other words, the lien filing achieves no result.  

Indian tribes in Oklahoma have widely differing laws and provisions (some are detailed, some loose) concerning recording a lien on a car title, and what the effect will be.  It may be necessary for courts to determine, tribe by tribe, whether the particular tribe’s lien-entry procedures are adequate to perfect a lender’s security interest.  (The Cherokees, for example, probably have adequate laws, but other tribes may have laws that do not state what the effect of filing a lien on their titles will be.)  Because the defect pointed out in Wilserv concerns the content of tribal laws, changing Oklahoma law won’t help.

Going forward, banks must continue making loans on Indian-titled vehicles–and should continue filing liens on those titles because the particular tribe’s procedures may be adequate.  (If the lien filing turns out not to be good, lenders should then be fairly comfortable that they will have an automatically perfected purchase-money security interest in “consumer goods” (the vehicle), provided that the loan (1) was made to purchase the vehicle, and also (2) was made to a consumer-purpose borrower.) 

If there is any doubt as to the effectiveness of a particular tribe’s lien-entry procedures, lenders should avoid making loans on that tribe’s car titles, both (1) in situations where the borrower is pledging an already-owned vehicle–such as a “refinance”—because this will not result in a purchase-money security interest; and (2) in situations where the loan is not made to a consumer (because then the vehicle cannot be considered “consumer goods”).  These two scenarios will restrict only a very small percentage of total loans currently being made on Indian car titles. 

3. Using W-9s (With SSN or ITIN) or W8-BENs to Open Accounts

Sometimes a person or entity opening an interest-bearing bank account does not have a U.S.-issued taxpayer identification number (TIN).  This situation is especially common for non-citizens living in the U.S.–who might enter this country either illegally or with a visa.  Sometimes even persons who reside in another country may apply for a U.S. bank account, and, depending on the circumstances, may need a TIN for that purpose.

If a customer doesn’t have a TIN but needs one, it helps if the bank understands Social Security and IRS requirements well enough to explain how the customer must proceed.

Many non-citizens are legally present in the U.S. and have authorization to work here. This status enables and requires them to obtain a Social Security number (SSN); and because they are eligible for an SSN, they are not allowed to obtain an individual taxpayer identification number (ITIN).  

Other non-citizens (for example, persons admitted on student visas) are in the U.S. legally, but are still considered to be here on a “temporary” basis—in the sense that they have no intention of changing their country of permanent residence.  Many persons admitted on student visas have applied only for permission to get an education, and have no authorization to work in the U.S.  Without work authorization, a person on a student visa is not allowed to obtain an SSN, but certainly can obtain an ITIN if required to have one in order to enter into transactions with someone who files 1099s or 1098s, or does other types of information reporting to the IRS.

If someone is residing in the U.S. illegally (no immigration documents), this disqualifies him from obtaining an SSN (even if he is working here), but he is still entitled to obtain an ITIN for tax-related purposes.

In a few cases, someone how is not residing in the U.S. wants to open an interest-bearing bank account, and from him the bank should obtain a properly filled-out W-8BEN, eliminating any requirement to do information reporting or backup withholding.

Whenever a customer does not have a TIN, but a TIN is required in the situation, the bank really only has two choices: (1) to turn the customer away, or (2) to help him understand what he needs to do to obtain the TIN.

Below I will explain (1) the separate IRS and CIP requirements for obtaining a customer identification number in opening an account; (2) the requirements for using an IRS Form W-9 versus an IRS Form W-8BEN in opening an account; (3) the procedures required to apply for an SSN, or to apply for an ITIN; and (4) which persons must obtain an SSN, versus who must apply for an ITIN.

1. Requiring Identification Numbers

Two separate (but overlapping) sets of rules may require a bank to obtain a customer’s TIN in connection with opening an account, depending on the circumstances. 

The first requirement is set out in the U.S. Treasury’s CIP regulation, at 31 CFR Section 103.121(b)(2)(i)(4).  These provisions relate to opening an account and forming a reasonable belief that the bank knows the customer’s identity.  For U.S. citizens, this regulation requires the bank to obtain an SSN.  For non-U.S.-citizens opening a new account, a bank must obtain an “identification number” that may be a U.S. TIN (SSN or ITIN) or may be some other permitted type of identification number, such as a foreign-issued passport number (noting the country of issuance).  The CIP regulation focuses on identification to prevent money-laundering.  Except for U.S. citizens, it does not require the bank to obtain an identification number that is a U.S. TIN.

What “identification number” (besides a U.S. TIN) a bank may choose to accept from non-U.S.-citizens for CIP is something each bank must decide.

The second set of rules is from the IRS, requiring a person to provide a U.S.-issued TIN to a third party in any situation where that entity is required to do information reporting to the IRS.  (The most common examples applicable to a bank are IRS Forms 1099 (interest earned) and 1098 (mortgage interest paid).  Other examples include reporting (1) amounts contributed to IRAs, (2) the proceeds of a sale of real estate (where the bank handles the closing), or (3) cancellation-of-debt income (relating to a loan charge-off).  For U.S. citizens, and also for anyone else considered to be a U.S. “resident,” this TIN information is collected on IRS Form W-9.  In certain additional cases, someone who does not spend enough time in this country to be considered a “resident” is still required by law to provide a TIN for information-reporting purposes.

An individual opening a bank account will be considered a resident of another country if he is neither a U.S. citizen nor a “resident” of the U.S. (legally or illegally).  This non-U.S-citizen/non-U.S.-resident should fill out an IRS Form W-8BEN (not a W-9) if the account is of a type that normally requires IRS information reporting. 

Depending on what the customer states in response to the questions in the W-8BEN, obtaining this form may allow the bank to avoid information reporting to the IRS and “backup withholding” with respect interest paid.  

Of course, if an account is not interest-bearing, there is nothing to report to the IRS, nothing to withhold, and no requirement to obtain a W-9 or a W-8BEN.  (The bank still needs to obtain an “identification number” for CIP, as outlined in 31 C.F.R. Section 103.121(b)(2)(ii), but this is not for the IRS.)  

2.  W-9 to Open Accounts

Every person who is either (1) a U.S. citizen, or (2) a U.S.-resident alien (whether that person is residing in this country legally or illegally) must complete a W-9 in connection with opening a deposit account on which interest will be paid and reported to the IRS on Form 1099, or in connection with mortgage interest paid by the borrower (reported to the IRS on Form 1098)

 (A bank is not required to use a separate Form W-9 if the bank has incorporated equivalent language into its regular bank forms.  Many banks have taken this approach. Everything stated below concerning a W-9 applies equally to the substitute language that may be included within a bank’s own forms to request the TIN of the person who is “primary” on the account.)

Anyone who is not a U.S. citizen but either (1) has a “green card” or (2) meets the IRS test of “substantial presence” in the U.S. will be considered a “resident alien.”  (The “substantial presence” test is complex. See IRS Publication No. 519, “U.S. Tax Guide for Aliens,” for details and examples.)

Stated in simplest terms, someone has a “substantial presence” if he has been physically present in the U.S. at least 31 days in the current year, and also has been present a total of 183 days combined during the present year and previous two years.  What’s hard is the method of computing the 183 days, and knowing how many days a person has actually been in the U.S. 

All days present in the U.S. in the current year will count toward the required total of 183 days; but only 1/3 of the days physically present in the U.S. in the previous year and 1/6 of the days physically present in the year before that will be counted toward the 183 days.  Banks would prefer not to get involved with making this calculation; but when the would-be customer has no “green card” it may be necessary for the bank to help in making a determination whether the person is considered a “U.S. resident” (someone who fills out a W-9), or instead a “nonresident alien” (someone filling out a W-8BEN). 

An illegal immigrant quite possibly has no SSN, and no ITIN, and for that reason is unable to fill out a W-9 in connection with opening an interest-bearing deposit account.  This does not mean that he can fill out the W-8BEN instead of a W-9.  (If a person who is required to fill out a W-9 has no TIN and will not apply for an ITIN, the bank must either (1) decline to open the account, or (2) open a non-interest-bearing account, which does not require the bank to obtain a W-9.

When an individual does not yet have either an SSN or ITIN to use in filling out a W-9, he can put “applied for” on the line that requests his TIN.  The bank can open an interest-bearing account on the basis that a number has been “applied for” (if the bank wishes to do so), but the identification number needs to be actually obtained and provided to the bank within a reasonable time (as explained below).

 If an individual is someone eligible to hold an SSN, he must obtain one and use it in connection with the W-9.  (He cannot obtain and use an ITIN instead.)  Similarly, a person who is not eligible to have an SSN must instead obtain an ITIN to use in completing the W-9.  In some cases an individual obtains an ITIN—at a time when he is ineligible for an SSN—but later his circumstances change (for example, he obtains a work visa).  This change makes him eligible to obtain an SSN.  If someone has both an SSN and an ITIN, it will always be true that the ITIN was issued first.  After an SSN is issued, the customer should discontinue using the ITIN.

On an account that is jointly held, the W-9 collects an identification number and a signature only for the person who is “primary.”  A correctly prepared W-9 does not attempt to gather an SSN or ITIN for any other joint owner(s).  Thus, for joint accounts a W-9 will satisfy IRS requirements, but it is not enough to satisfy CIP, which requires the bank to obtain an “identification number” for each person who is an owner.  
 
Business customers of a bank also use Form W-9 (or substitute language in the bank’s other forms) to open an interest-bearing bank account. For a business that is not a sole proprietorship, the business TIN will usually be an employer identification number (EIN).  One-owner LLCs and one-owner Subchapter S corporations are treated differently, because they are classified by the IRS as “disregarded entities” for tax purposes.  What this means is that the IRS will not issue a new EIN, but instead the business must use the TIN of its owner on the W-9 (normally an SSN, but sometimes an EIN or ITIN).  

Following is an unusual example of an outcome that the IRS rules might cause:  Assume that a U.S.-based one-owner LLC (or U.S.-based Subchapter S corporation) is owned by a “nonresident alien.” In this case the nonresident alien must obtain an ITIN so that the LLC (or Subchapter S corporation) located in this country will have a TIN that it can use for is business.  (A business based in the U.S. is a “U.S. person,” and must fill out a W-9 in order to open an interest-bearing deposit account.  It needs to use its owner’s TIN on the W-9, even though the owner is a nonresident.  By contrast, if the owner applied for an interest-bearing deposit account in his own name, he would not be considered a “U.S. person,” but rather a nonresident alien, and would be required to fill out a W-8BEN, not a W-9.) 

This rather uncommon example illustrates how difficult it sometimes can be for a bank to understand and explain to the customer exactly what the IRS rules require, and why.  (IRS forms are not primarily designed to be simple for a customer or the bank, but instead are focused on how to achieve “correct” information reporting to the IRS and correct tax return filing.)  

3.  W8-BEN for Opening Accounts

As explained above, an individual cannot be classified as a nonresident alien (someone eligible to fill out a W-8BEN) if he passes either the “green card test” or the “substantial presence test.”

Although a nonresident alien who wants to open an interest-bearing deposit account in the U.S. must fill out and provide to the bank an IRS Form W-8BEN, this form usually does not require the individual to have either an SSN or an ITIN.  Logically, if a person is allowed to provide a W-8BEN instead of a W-9, he also should be allowed under the bank’s CIP policy to provide some type of “identification number” that is neither an SSN nor an ITIN.  Someone who discloses no TIN on a W-8BEN instead might provide an identification number from a passport (country of origin and number), or from another type of government-issued photo ID (such as a Mexican driver’s license), in compliance with the provisions of 31 CFR Section 103.121(b)(2)(ii).

A bank is not required to do IRS information reporting on an individual (1099-INT) nor to do “backup withholding” from the interest income he earns on deposits, if he truthfully swears on the W-8BEN (1) that he is not a resident alien living in the U.S., (2) that he is a resident of another country (with his permanent address given), (3) that his country of residence has a tax treaty with the U.S., and (4) that the interest income received is not connected with conduct of a trade or business in the U.S.

A few nonresident aliens actually have an SSN (for example, because they formerly held a U.S. work visa): and some may already have an ITIN (for  reasons relating to filing a U.S. tax return in a previous year, or a previous need to provide a TIN in connection with U.S. information reporting).

If a nonresident alien preparing a W-8BEN does have an SSN or ITIN, this number should be disclosed on the form.  A W-8BEN that provides a U.S. TIN will remain effective permanently—or until there is some material change in the information provided (such as a change in the individual’s country of residence for tax purposes). 

However, if a W-8BEN is provided by a nonresident alien who does not disclose an SSN or ITIN on that form, the W-8BEN will expire exactly three years following the last day of the year in which the W-8BEN was provided to the bank.  After that time period expires the bank must do “backup withholding” on interest income earned by the individual, unless the bank obtains an updated Form W-8BEN.  The update will have the effect of putting the nonresident alien back in compliance for an additional period of years, calculated in the same manner as the original filing.

If a nonresident alien won’t or doesn’t fill out a W-8BEN, he still remains eligible to open a non-interest-bearing deposit account without violating IRS requirements—but this is subject to any restrictions or policies contained in the bank’s own guidelines.  (Opening an account that is non-interest-bearing still leaves the bank with a requirement to do CIP on the individual.)

As stated earlier, for a joint account a bank obtains a W-9 only for the person who is considered “primary” on the account.  But for an interest-bearing bank account held jointly by nonresident aliens, a W-8BEN must be obtained for each of the owners of the account, or else the bank will be required to do “backup withholding” at a 30% rate on the amount of interest earned. 

The benefit for the nonresident alien in providing a W-8BEN is that he then (1) will not have tax withheld by the bank from his interest income, and (2) he may be able to pay tax on that income at a lower rate that applies to him in his own country, assuming that his country has a tax treaty with the U.S., as stated in the W-8BEN.

The benefit for the bank in receiving a W-8BEN is that the bank does not have to do backup withholding.  (Most banks would prefer to close an account, or not open it in the first place, to avoid doing backup withholding.)

4. Types of Social Security Cards

To apply to the Social Security Administration for an SSN (on Form SS-5), an individual generally must be either (1) a U.S. citizen, or (2) a legal alien allowed to work in this country.

There are three types of Social Security cards:

(1) The standard card allows a person to work without restriction.  This is issued to U.S. citizens, and also to individuals who are lawfully admitted to the U.S. on a permanent basis.

(2) The second type of card says, “Valid for Work Only with DHS Authorization.”  This card is issued to people who are lawfully admitted to the U.S. on a temporary basis and who have Department of Homeland Security (DHS) authorization to work. These individuals typically will have a work visa that expires after a certain time (although it could be renewed), or might have a student visa of a type that allows the person to work.

(3) The third type of card says “Not Valid for Employment.”  This is issued to someone from another country who is lawfully admitted to the U.S. but does not have work authorization from DHS.  The person qualifies for a Social Security card because there is some valid non-work reason for needing an SSN, based on federal, state or local law. 

(It might the case that one spouse is admitted to the U.S. on a work visa—for example, a professor or medical researcher who comes to this country for a year to work in a university.  The other spouse needs a visa, but not a work visa, to accompany the first person.  This other spouse generally will have to obtain an ITIN if the couple files a joint U.S. income tax return.  However, in some cases this other spouse may actually need an SSN instead of an ITIN, if an SSN is required to apply for or receive some type of non-work benefit under a federal, state or local law.)

No matter which of the three types of Social Security card an individual has, the SSN on the card should be used in filling out a W-9 (the form required for a resident alien opening an interest-bearing deposit account). The fact that a Social Security card is restricted (such as “Not Valid for Employment”) does not in any way diminish the fact that this is the person’s correct TIN.  

6. Documentation for Issuing an SSN

In order to apply for an SSN, a person who is not a citizen must be able to provide a “current U.S. immigration document” and also a “foreign passport with biographical information or photograph.”  If someone is not a U.S. citizen (in other words, he is neither born in the U.S., nor a child of U.S. citizens, nor a naturalized citizen) the only way he can obtain an SSN is to have lawful immigration papers and a foreign passport.

If someone who is not a U.S. citizen wants to open a deposit account, and gives the bank his SSN verbally, or shows a Social Security card that “doesn’t look right,” a bank can follow up by asking to see (1) his current immigration document issued by the Department of Homeland Security (such as Form I-551, I-94, I-688B, or I-7666), and also (2) his foreign passport with biographical information or photograph. 

(It should be reasonable for a bank to request these documents as part of CIP, because every resident alien with an SSN must have these—or at least he did when he applied for the SSN.  If a non-citizen providing an SSN acts like he cannot provide immigration papers and a foreign passport, he may be using false SSN information to try to open an account.)

A non-U.S.-citizen applying for an SSN cannot provide foreign-notarized photocopies of required identity documents.  He must furnish either the original identification documents or copies certified by the issuing agency.  This documentation requirement perhaps leads to a higher assurance of genuineness, compared to the documentation process for obtaining an ITIN.  A  bank officer looking at a valid Social Security card (if he is reasonably convinced that it is not counterfeit) should be fairly comfortable with the fact that the Social Security Administration has required and examined adequate proof of the person’s identity before issuing the SSN.  (If the Social Security card looks valid, the bank’s CIP task is simply to develop a reasonable assurance—by means of a proper government-issued picture ID, or personal acquaintance–that the person applying for the account is the same person named on the card.)

When a U.S. citizen applies for an SSN he usually provides a copy of a birth certificate, certified by the issuing agency—but a passport is an acceptable substitute.  

7.  Appropriate CIP Documentation?

A bank’s CIP procedure for an individual (using the “verification through documents” approach) typically requires “unexpired government-issued identification evidencing nationality or residence and bearing a photograph or similar safeguard, such as a driver’s license or passport.”  31 CFR Section 103.121(b)(ii).  Although this requires a “government-issued picture ID,” the regulation does not say what government must issue the ID.  A foreign passport (one of the documents required of a non-citizen in obtaining an SSN) is technically sufficient for purposes of the regulation—and from there it’s just a question of what the bank’s own CIP policy allows.  

Every bank’s CIP policy should make clear what specific types of government-issued picture ID the bank will allow as the basis for opening an account.  (This may sound simple, but sometimes is not.  To what extent is it appropriate for a bank to rely on a government-issued ID printed in a language that no one at the bank can understand?  Can the bank form “a reasonable belief that it knows the true identify” of the person?  If the bank has never seen a government-issued picture ID of a particular type—such as a passport issued in Poland—can the bank form a reasonable opinion whether the document is genuine, and/or that it knows the customer’s true identity?) 

There is an argument cutting in the opposite direction, relating to the existence of a substantial percentage of individuals in the bank’s immediate market area that may speak a particular foreign language (such as Spanish).  Is a bank reasonable in refusing to accept a government-issued picture ID printed in that foreign language–even though no one at the bank reads the language?  For lending and account-opening purposes, the bank may need to consider hiring someone who can speak and understand documents in whatever foreign language is used by a substantial percentage of individuals in the bank’s market area.

8.  Why Apply for an ITIN?

Someone who lives in the U.S. long enough to satisfy the “substantial presence” test, who therefore is considered a “resident” (even if present illegally and not officially authorized to work) will be subject to U.S. tax return filing and tax payment requirements.  To comply with those requirements he needs an ITIN.  Even if this person doesn’t file tax returns, he needs to obtain an ITIN to provide to third parties who do information reporting to the IRS.  When a resident alien (legally in the U.S. or not) opens an interest-bearing deposit account, he triggers the requirement to obtain an ITIN (unless he has an SSN).  

An ITIN is a specifically tax-related identification number, and not a general-purpose identification number.  The IRS will not issue an ITIN unless the applicant has a tax-related reason for needing such a number. 

The ITIN creates somewhat of a “Catch-22” for an illegal immigrant:  If the individual is trying to keep a low profile, applying for an ITIN seems contrary to what he is attempting, by revealing the fact of his presence in the U.S., his name, and his address.  If a person has no ITIN but needs one to open an interest-bearing deposit account, this leads to the question of why he hasn’t already obtained one in connection with income tax returns that he is required to file.  Too much inquiry can be bad—and quite a few illegal immigrants would prefer to do nothing that requires an ITIN or information-reporting to the IRS.

Following are examples of why someone present in the U.S. legally would need to apply for an ITIN (although that person is ineligible to obtain an SSN);

(1) A foreigner, while vacationing in the U.S., has gambling winnings. To avoid backup withholding, and possibly to pay a lower tax rate that applies in his home country, he applies for an ITIN.

(2) A foreign exchange student in the U.S. on a student visa has no DHS authority to work.  He wants a bank account to which his parents abroad can wire money.  He technically may be a “resident alien” based on amount of time present in this country, but he isn’t authorized to work, so he cannot obtain an SSN.  To open an interest-bearing deposit account he needs an ITIN.

(3) A husband and wife from another country both have U.S. work visas and obtain SSNs.  Their two small children (not born in the U.S.) accompany them here.  If the parents file a joint U.S. tax return and want to claim the children as dependents, the children must have ITINs.  (The children can’t obtain SSNs because (1) they’re not citizens, and also (2) they don’t work.) 

9. Valid Tax Reason for ITIN

To obtain an ITIN, an individual must fill out IRS Form W-7.  The most common way for a resident alien to apply for one is to attach the W-7 to his U.S. income tax return—because it requires an identification number that the individual does not yet have.  There are four other situations (exceptions) in which an individual can obtain an ITIN without attaching his W-7 to his income tax return.  These exceptions all relate to a third-party entity’s request for a TIN from the individual in order to satisfy IRS information-reporting requirements.

The first exception (already mentioned) includes a “resident alien” opening an interest-bearing deposit account on which a bank must do information reporting to the IRS.  The same exception applies when a resident alien will be receiving distributions from pensions, annuities, royalties or dividends, and a paying agent will be required to do information reporting.  The customer must include with the W-7 a letter from the third party (such as a bank), stating that the individual needs an ITIN in order to satisfy an IRS information-reporting requirement.  (Page 33 of IRS Publication 1915, “Understanding your Individual Taxpayer Identification Number,” has a sample “Letter from Withholding Agent” that satisfies this requirement.)

The second exception relates to income situations such as an honorarium for a speaking engagement in the U.S.; a student non-work-related fellowship, scholarship or educational grant; or a vacationer’s gambling winnings in the U.S.

The third exception applies to someone with a home mortgage loan, who must give the lender an ITIN in order to receive a report of mortgage interest on IRS Form1098.

A fourth exception applies when a foreign person sells real property located in the U.S.Backup withholding and information reporting requirements may apply and an ITIN is needed to allow information reporting required by the IRS.

In each of the exceptions just listed, an individual who has no U.S. identification number is allowed to apply for an ITIN, but not before a third-party entity (such as a bank) needs to collect that number.  (The individual can’t apply for an ITIN before he is asked to provide one, so he often must put “applied for” on the form that requests his TIN.  This sequence of steps certainly can be frustrating.)

10. Documentation to Obtain an ITIN

To apply for an ITIN, an individual must complete IRS Form W-7.  Generally, a W-7 can be submitted only with a U.S. Federal income tax return that requires a TIN.  If an individual is not filing a tax return with the W-7, but needs an ITIN based on one of the four exceptions, the individual instead must attach documentation supporting the exception. (For example, if the ITIN is needed in connection with opening an interest-bearing deposit account, he needs a letter from the bank stating that fact, as mentioned above.)  

Unlike a resident alien applying for an SSN, someone applying for an ITIN might not have any immigration documents or foreign-issued passport. The IRS accepts thirteen types of identification in processing an ITIN.  These include passports and U.S. visas, but also U.S state-issued or foreign driver’s licenses, U.S. state-issued non-driver IDs, and U.S. or foreign military identification cards.  Also accepted are national identification cards (such as Mexico’s Matricula Consular), foreign voter registration cards, and birth certificates. Children under 14 (or under 18 if a student) can present medical records and school records.

The IRS will accept photocopies of the above documents, notarized by someone in a foreign country—and not just original documents or official certified copies.  This lower documentation standard is practical and may be necessary, particularly in dealing with “undocumented” individuals.  But in some cases the documents provided to the IRS to obtain an ITIN would not meet a bank’s regular CIP standards.

Apart from concerns about the specific type of documents being presented along with an ITIN (e.g., whether the copies provided to the bank are “real” or manufactured), the bank may not feel comfortable with documents written in a language that bank employees cannot understand.  In dealing with someone who has an ITIN or has “applied for” an ITIN, the bank first may want to decide (case by case) whether it’s comfortable with the person’s documents.

Some banks, before approving a new account, will run the person’s name and SSN through a service that reports bad history on bank accounts.  Someone who has no SSN, and is only now applying for an ITIN, will be completely “off the radar screen.”  At least for transaction accounts, a bank might try to obtain some “character references” in place of past account history that is unavailable and probably only exists in the individual’s country of origin, not here.  

11. ITIN “Applied For”

An individual or business filling out a W-9 is allowed to put “Applied For” in Part I of the W-9, on the line that asks for a TIN.  Based on the W-9 instructions, a bank that receives a W-9 stating that a TIN (SSN, EIN, or ITIN) is “applied for” can wait 60 days for the customer to obtain a TIN before the bank is required to begin backup withholding on interest earned.

The approach taken in the CIP rules is similar to the W-9 rules, allowing a bank to open an account based on a TIN that is “applied for” but has not yet been obtained. If the bank’s own CIP policy will allow it, a customer can open an account without having received a TIN yet.  However, the CIP rules require a bank to have procedures to confirm that the customer actually applied for a TIN before opening the account, and for obtaining the TIN from the customer “within a reasonable period of time after the account is opened.” 

A company can usually obtain an EIN almost immediately, because the SS-4 application can be made online through the IRS webpage, or toll-free by calling 1-(800)-829-4933.  Obtaining an ITIN for an individual, however, is a lengthier process—partly because of the identity documents that must be provided and reviewed.  Generally it takes about six weeks to get an ITIN, but it could take as much as eight to ten weeks for an ITIN that is requested during the peak tax-filing season.