This report presents the results of our review to determine whether Individual Taxpayer Identification Numbers (ITIN) were being issued without sufficient supporting documentation. The overall objective of this review was to determine whether Applications for IRS Individual Taxpayer Identification Number (Form W-7) were efficiently and effectively processed and ITINs were appropriately issued. This audit was part of the Treasury Inspector General for Tax Administration’s Fiscal Year 2008 Annual Audit Plan under the major management challenge of Providing Quality Taxpayer Service Operations.

Impact on the Taxpayer

The purpose of the ITIN is to provide alien individuals, whether or not they reside in the United States, an identifying number for use in connection with United States tax return filing requirements. The volume of ITINs is growing. When Forms W-7 are not effectively processed and ITINs are inappropriately issued, the risk increases that ITINs are being used to file fraudulent tax returns. Inadequate processing of ITIN application packages increases the risk to both the taxpaying public and the Federal Government for potential losses associated with ITIN applicants.

Synopsis

The ITIN was created to provide individuals who are not eligible to obtain a Social Security Number with an identification number for tax purposes. The Internal Revenue Service (IRS) issues ITINs to help individuals comply with Federal tax laws and provide a means to efficiently process and account for tax returns. Only individuals who have a valid filing requirement or are filing a tax return to claim a refund of over-withheld taxes are eligible to receive an ITIN. Individuals submit Forms W-7 through Acceptance Agents1 or by submitting them directly to the IRS.

ITINs were issued without sufficient supporting documentation. A statistical sample of 658 Forms W-7 selected from 1.5 million application packages (cases) submitted from January 1 through November 21, 2008, showed that 510 cases (78 percent) contained errors. The highest error rate (87 percent) was in applications submitted through Certified Acceptance Agents. This includes instances in which the Agents did not provide the documents required to support the Forms W-7 submitted by them to the Treasury Inspector General for Tax Administration. However, there was also a significant error rate (35 percent) in application packages submitted directly to the IRS.

A Certified Acceptance Agent is authorized under an agreement with the IRS to submit a Form W-7 to the IRS on behalf of an ITIN applicant without furnishing supporting documentary evidence. Instead, in the certificates of accuracy, Agents certify to the IRS that they have reviewed the appropriate documentation evidencing the ITIN applicant’s identity and alien status, and that they are maintaining a record of such documentation.

IRS employees process, but do not review, the applications submitted by Certified Acceptance Agents. They input the information from the Forms W-7 into the ITIN management information system called the Real-Time System. If all requirements are met, the ITIN is assigned systemically by the ITIN Real-Time System. Eighty-seven percent (467 of 535) of the sample of application packages submitted by Certified Acceptance Agents contained errors. For example, 1) cases did not contain the documents required to issue an ITIN, 2) Forms W-7 provided to us by the Certified Acceptance Agents did not agree with the original Forms W-7 that were sent to the IRS, 3) cases did not contain the required certificates of accuracy or the certificates were missing required information and/or signatures, or 4) the Certified Acceptance Agents did not comply with our request for copies of the application packages.

IRS employees review and process applications submitted directly to the IRS. Thirty-five percent (43 of 123) of the application packages sampled that were submitted directly to the IRS by mail or through Taxpayer Assistance Centers3 contained errors. The errors ranged from missing and illegible documents to inconsistencies between the Forms W-7 and the supporting documents.

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There are also no controls to prevent an ITIN from being used by more than one taxpayer on multiple tax returns. More than 60,000 ITINs were assigned and used on multiple tax returns processed in Calendar Year 2008. As with Social Security Numbers, ITINs are specific to individuals and should be issued to and used only by that individual.

[snip]

In addition, more than 55,000 ITINs were used multiple times on approximately 102,000 tax returns with refunds totaling more than $202 million. [Read that again.]

The Real-Time System contains inaccurate data and is insufficient to oversee the Program. The IRS states that the System provides a one-stop service for processing Forms W-7 and issuing ITINs. The System processes Forms W-7 in real-time and assigns the ITIN or creates reject or suspense Forms W-7 automatically. Nevertheless, the information does not accurately reflect what type of Agent submitted the Forms W-7 and does not accurately reflect the information captured on the Forms W-7.

Research on the Real-Time System for 547 cases in our statistical sample found that 270 records (49 percent) contained inaccurate information relating to what type of Agent submitted the application. The IRS does not know the volume of Forms W-7 that are submitted by Certified Acceptance Agents and, if not corrected, approximately 200 Certified Acceptance Agents may not be included in any compliance activity.

In addition, information reflected on 110 (20 percent) of the 547 Forms W-7 was not transcribed correctly to the Real-Time System. Transcription errors included incorrect identification documents, birth dates, codes/reasons for submitting the Forms W-7, names, and/or addresses.

via Individual Taxpayer Identification Numbers Are Being Issued Without Sufficient Supporting Documentation

The system is set up to make it easy. The easier the system, the higher the probability of fraud. Think health care, which affects everyone, not just illegals.

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