by Ken Rankin

Washington - Internal Revenue Service officials have been given a thumbs up from headquarters to freeze on tax refunds sought by aliens in the United States using fictitious Social Security numbers.

In an advisory from the IRS’s national office, tax service officials concluded that returns filed with a W-2 form listing an incorrect Social Security number are not submitted in "processible" form, even if the 1040 bears the taxpayer’s correct Individual Taxpayer Identification Number.

ITINs are issued by the IRS for use on tax returns that are filed by resident or non-resident aliens who are ineligible for U.S. Social Security numbers.

Mismatches typically occur "when a taxpayer has a valid ITIN but provides an erroneous SSN to a potential employer in order to secure a job in the U.S.," IRS Administrative Provisions and Judicial Practice branch chief James C. Gibbons explained. "Presently, the service processes these returns using the valid ITIN and issues the refund to the taxpayer."

That practice will change under the new advisory, which effectively opens the door for the agency to challenge tax refund requests from thousands of undocumented immigrants who are working illegally in the United States.

Although the notice of the new policy makes no mention of heightened security since the Sept. 11 attacks, it parallels a number of other actions by Federal officials providing for stricter enforcement of immigration rules.

The new determination was issued in response to a request for guidance from the agency’s Partnerships, Trusts and International Section.

In explaining the new policy, Gibbons conceded that tax returns containing the mismatched numbers, nevertheless, may be legally valid, and that the claims for refunds on those returns may be equally legitimate.

Because of the conflicting identification numbers, however, "the service cannot ascertain with certainty that the attached Form W-2 belongs to the taxpayer filing the Form 1040," he explained.

These "mathematical verifiability" problems render such returns to be "not in processible form," Gibbons said. "Therefore, the service can freeze the refund amount claimed on the Form 1040 pending the resolution of the mismatching ITIN and SSN" information, he concluded.

Under the new policy, no interest will be due to the taxpayer for the delayed refund unless the IRS fails to make payment within 45 days of resolving the identification number conflict.

Although the policy of freezing refunds that contain an incorrect SSN would apply to anyone regardless of citizenship, the directive specifically refers to a taxpayer with a valid ITIN but who "provides an erroneous SSN to a potential employer in order to secure a job within the U.S." Until now, the IRS processed these returns using the valid ITIN and issues the refund to the taxpayer.

According to the advisory, the legal issues for consideration are: whether the Form 1040 that contains a Form W-2 with an incorrect SSN is a valid return; if the return is valid, whether it constitutes a valid claim for refund; and, whether the return is in processible form.

The IRS concluded that such returns are valid, and do constitute valid claims for refund. However, if the IRS cannot resolve the mismatch between the Form 1040 ITIN and the W-2 SSN, it cannot determine that the taxpayer made an overpayment, which requires the issuance of a refund. Moreover, without the correct ITIN listed on the W-2, the IRS cannot be sure that the attached W-2 belongs to the taxpayer filing the Form 1040.

As a result, the return is not processible, and the IRS can freeze the refund amount claimed on the Form 1040 pending resolution of the mismatching ITIN and SSN or the determination that an overpayment exists, without subjecting itself to a liability for overpayment interest.

The advisory noted that if the IRS does not issue the refund, the taxpayer can file suit for refund once the IRS makes a decision on the claim, as long as the applicable period of limitations has not expired. If the IRS does not render a decision, the taxpayer may file a suit for refund beginning six months after the date the claim for refund is filed.

Roger Russell contributed to this report.

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