NEW ITIN DOCUMENTATION PROCEDURES ARE A PAIN

Nonresidents of the U.S. are required to have a taxpayer identification number for most U.S. tax reporting purposes, including FIRPTA reporting on sales of U.S. real property interests. Since such persons do not have social security numbers, they have to apply to the IRS for an International Taxpayer Identification Number (“ITIN”) via a Form W-7 application.

The Form W-7 requires certain documentation to be attached. In the past, a U.S. notary could make a notarized copy of an applicant’s passport, and that would be sufficient. Since earlier this summer, however, applicants must submit original documentation or certified copies of their documentation certified by the issuing agency. The IRS may hold on to this documentation for up to 60 days. Would you want to mail in your passport and hope you get it back? And what if you needed to travel within 60 days?

Instead of submitting an original document, a certified copy from the issuing agency is usable. However, the time, cost, delay, and hassle of getting a certified copy of a passport will vary from country to country. Birth certificates may also be used.

More formal rules are promised for 2013, but there is no indication that there will be any easing of the above requirements. There are some exceptions to this reporting.

Even before these new rules, getting an ITIN has always been something of a pain. Now, it is more difficult than ever. While perhaps it may be easier for someone to defraud the IRS and obtain an ITIN on an invalid form of identification via a certified copy through a notary vs. a direct submission to the IRS, is this level of inconvenience really necessary? Does anyone at Treasury care anymore about inconvenience to taxpayers when writing rules? Anyone who has tried to read the FATCA rules already knows the answer to that.

IR News Release 2012-62

STATUTE OF LIMITATIONS QUIZ

Facts & Law:

A. Income taxes must be assessed within 3 years of the later of the  date the return is filed or the due date of the return.

B. However, the assessment period remains open indefinitely “in the case of a false or fraudulent return with the intent to evade tax.”

C. A shareholder in a Subchapter S corporation is taxable on his or her pro rata share of the net income of the corporation.

D. A Subchapter S corporation files a fraudulent return. The taxpayer-shareholder had nothing to do with the preparation or filing of the return, and was not knowledgeable of the fraud.

Question:

Can the IRS assess the taxpayer for a corrected share of the income of the corporation more than 3 years after the filing and due date of the return?

Answer:

No, according to the IRS.

Interestingly, fraud by one spouse in filing a joint tax return keeps the statute open for the other spouse. That was not persuasive here, because spouses are jointly and severally liable for joint return taxes.

In Vincent Allen, 128 TC 37 (2007), the Tax Court held that an income tax return preparer's fraud kept a taxpayer's income tax return open indefinitely. However, that precedent was not applicable here because the intent in that case was to evade the taxpayer’s tax – that was not the case here.

Chief Counsel Advice 201238026

INCOME FROM SURRENDER OF A LIFE INSURANCE POLICY

The cash value of a surrendered  life insurance policy is includable in gross income to the extent it exceeds the taxpayer's investment in the insurance contract. This excess is taxable as ordinary income.

There are two elements to this computation. First, what is the cash value. Second, what is the “investment in the insurance contract.” A recent case (Brown v. Comm.)  illustrates some elements that go into these two items.

Cash Value. In the case, the insured did not receive the cash value. Instead, it was applied by the insurance company to pay off a policy loan. The court nonetheless included the cash surrender value applied to the loan as being received by the insured.

Investment in the Insurance Contract. This generally is the total insurance premiums paid by the insured. However, the court recognized two reductions to the investment in the contract. First, the insured had surrendered some of his insurance coverage. This surrender was treated as a reduction in the investment in the contract. Second, during the term of the policy the insurance company had used some of the dividends earned on the policy to purchase additional coverage.

Oftentimes, the quick and dirty computation of the income arising from the surrender of a policy is the cash received by the insured, over the premiums previously paid. This case reminds us that adjustments to both these items may apply that can materially impact this computation.

Brown v. Comm., 110 AFTR 2d 2012-XXXX (CA7 09/11/2012)