Buried in a report from the Treasury Inspector General's Office of Audit comes word that IRS issued ITIN's may be suspect. And yet you are on the hook if you file an information return with the wrong TIN.  

An Individual Taxpayer Identification Number (ITIN) is issued to individuals who are required to have a Taxpayer Identification Number for tax purposes, but do not have and are not eligible to obtain a Social Security Number.  ITINs are issued regardless of an individual’s immigration status, as both resident and nonresident aliens may have a U.S. filing or reporting requirement under the Internal Revenue Code. Just to give you an idea of how important this issue is note that in calendar year 2014, the IRS issued 638,000 ITINs.

However an ensuing audit (see report reference number 2015-40-038) found that the IRS does not have effective processes or procedures to ensure the authenticity of copies of documents certified by foreign issuing agencies.  In particular tax examiners responsible for reviewing these documents do not have the tools nor the expertise needed to get the job done.

The report concluded that apart from not having the most important tool to verify these documents, the processes and procedures the IRS has developed do not provide reasonable assurance that ITINs are not being issued based on false documentation. Ostensibly exactly such policies and procedures are being development in response to the report, and to better ensure the accuracy of the ITIN process - but what does this mean for you?

First off it means you are still on the hook for any penalties or audits that can arise from making payments to such a payee, and then unbeknownst to you filing with an incorrect TIN reported on the ensuing Form 1099. As such we recommend that you make sure to thoroughly document your validation efforts whenever you get a payee with an ITIN (which looks like a social security number but begins with a nine and has a seven/eight as the fourth digit).

At a minimum this means making sure the payee information is provided on the Form W-9, and that such W-9 is signed/certified by the payee attesting that all of the information provided is correct. In addition, you should keep a copy of the IRS report (provided above via the link) on file. This way if an examiner ever inquires about such a payee you can also provide documentation showing that the problem could be of the IRS own making and not yours.