@Chillkann wrote:
My question is, what if in the process of applying for ITIN something goes wrong and the ITIN is not issued, then is there a way that I can return the money back to DCSA? or can I have it reported as taxable income via a Tax amendment and attach a cover letter explaining the circumstances? In short, once the money is disbursed from the DCSA account, can it be returned or filed as a taxable income?
We're getting outside my expertise, @pk might be able to help.
The tricky thing is that a person can't normally get an ITIN unless they file a return showing US income, unless they fall into one of the exception categories. If you can get an ITIN quickly and without filing a return, I would do that. Assuming you can't, your order of actions will probably be something like this:
1. Parent files a tax return listing household employee income, without a W-2. They would put the income on line 1 and write "HSH" next to it. This can probably be done in Turbotax online by searching for "household employee" in the program, it should be in the "other uncommon income" section.
2. Parent mails the W-7, any required proof, and the tax return, to the IRS address for processing the ITIN application.
3. The IRS assigns an ITIN, mails it to your MIL, and forwards the tax return for processing.
4. You use the ITIN to claim the dependent care credit/FSA reimbursement on form 2441. This means you may file your tax return late. Get an extension if needed.
5. You skip filing the W-2 this year since it's basically impossible (at best, you would be filing it very late.)
Here is another possible workflow.
- Parent files a tax return using "HSH" to declare the income, and sends it along with the ITIN application to the IRS office.
- At the same time, you file your tax return. Without a valid tax number for the care provider, you leave the SSN field blank. Turbotax won't let you e-file but should let you print your return. Write "ITIN applied for" in the box for the caregiver's tax number. Sign the return and file by mail, and include a written statement that gives your mother-in-law's name, date of birth, address, visa number, and explains that she is reporting the income on a tax return that has been filed with an ITIN application.
On the issue of the DCFSA, the IRS places the compliance burden on the administrator, not you. There's nothing in the law that I know of that would require you to repay the money, or pay a penalty on your tax return if no ITIN were issued.
