There are many reasons why a person needs to obtain an ITIN number. Some are widely known, but there are other reasons that are not mentioned as frequently and yet, are of paramount importance to certain individuals who qualify under these rules.
Let's start by explaining what an ITIN number is
The ITIN (Individual Taxpayer Identification Number) is a Tax Identification number provided by the IRS. It consists of 9 characters, always starting with the number 9 and a 7 or 8 in the fourth box, for example: 9XX-7X-XXXX
See also: How to get your ITIN number from anywhere in the world (article in Spanish)
Reasons why you might need an ITIN.
The IRS assigns an ITIN Number to individuals who must file taxes in the United States, but are not able to obtain a Social Security Number (SSN). This may happen when a person is a U.S. Tax Resident, but is not a Citizen or Permanent Resident, and had earned income in the country; however, as previously mentioned, there are multiple reasons to apply for an ITIN or to be required to pay taxes in this country.
Within the W-7 form (the form used to apply for the ITIN number) the IRS offers certain checkboxes, with different options to choose from, to justify your ITIN request:
- Non-resident alien required to get an ITIN in order to claim tax treaty benefit
- Non-resident alien filing a U.S. federal tax return
- S. Resident Alien (based on number of days present in the United States) filing a U.S. federal tax return.
- Dependent of U.S. citizen/resident alien.
- Spouse of U.S. citizen/resident alien.
- Nonresident alien student, professor or researcher filing a U.S. federal tax return OR claiming an exception
- Other
This last section of "Other" is where lesser-known reasons for applying for an ITIN come into play. The IRS says that "often, third parties (such as banks and other financial entities or institutions) that are mandated to report information and comply with retention requirements will ask you for an ITIN, so that they can file the information returns required by law." For this, there are certain exceptions that can be used to request an ITIN.
Exception 1: Income from passive activities — tax withholding by third parties or tax treaty benefits.
This exception may apply to you if you receive income from a partnership, interest income, annuity income, rental income, or other passive income that is subject to withholding by third parties or tax treaty benefits.
According to this exception, the following individuals should obtain an ITIN number:
- Individuals who are partners in a U.S. or foreign partnership that makes investments in the United States and owns assets that generate income and are required by the IRS to file a tax return and withhold federal taxes
- Individuals who hold an interest-generating bank account that generates income that is directly related to their business or trade in the United States and who are required by the IRS to file a tax return and/or withhold U.S. federal taxes.
- Individuals who are "resident aliens" for tax purposes who have opened an interest-generating bank account and generate income and are required by the IRS to file a tax return and/or withhold U.S. federal taxes.
- Individuals who receive income distributions during the current tax year, such as pensions, annuities, rental income, royalties, dividends, etc., and who are required to provide an ITIN to the withholding agent (e.g., an investment company, insurance agency, financial institution, etc.) in order to submit a tax return or to withhold U.S. taxes.
Exception 2: Other income
This exception may apply to you if:
- You claim the benefits of a U.S. income double taxation treaty with a foreign country and any of the following scenarios apply:
- You are exempt or subject to a reduced withholding tax rate on wages, salaries, compensation and fee payments and will submit Form 8233 to the income payer.
- You are exempt or subject to a reduced tax rate on scholarship or grant income (i.e. foreign students, academicians, professors, researchers, foreign visitors or any other individual) and will submit Form W-8BEN to the withholding agent.
- Individuals (i.e. foreign students, academicians, professors, researchers or any other individual) who receive non-compensatory income from scholarships or grants that are required by the IRS to submit a return and/or withholding during the current year who are NOT claiming benefits from a tax treaty.
- Non-resident aliens who visit the United States and who have gambling or betting winnings and seek to claim the benefits of a tax treaty for an exempt or reduced federal withholding tax rate on that income, and will use the services of a gaming officer such as an IRS ITIN Acceptance Agent.
Exception 3: Mortgage interest: third-party reports
This exception may apply to you if you have contracted a residential real estate mortgage loan on assets that you own in the United States and it is subject to the third party mortgage interest return.
Exception 4: Alienations of property rights held by a foreigner on real estate assets located in the United States—withholding by third parties.
This exception may apply to you if you are part of an alienation of property rights held by a foreigner on real assets located in the United States, which is generally subject to retention by the assignee or buyer (withholding agent). This exception may also apply to you if you receive a notice stating that no gains or losses are acknowledged under Section 1.1445-2(d)(2) of the Treasury Regulations.
Exception 5: Treasury Decision 9363 or TD 9363
This exception may apply to you if you have a non-U.S. representative obligation from a foreign public limited company that needs to obtain an ITIN in order to file electronic returns with the IRS under TD 9363 and file Form W-7(SP) along with Form 13350, Registration for e-services, in English
These are all the reasons and exceptions set by the IRS for which you might request an ITIN number. We recommend reviewing this document in which the IRS explains in depth how to fill out the W-7 form to request this number; furthermore, it provides a more complete view of the exceptions and documents required for each of the cases: Instructions for Form W-7
Likewise, we recommend checking with an experienced accountant that can guide you throughout this process, you can schedule a free call with one of our specialists now.