Fighting Identity Theft, IRS Issues Final Rules on Truncated Identification Numbers

The IRS issued final regulations (T.D. 9675) that allow the use of truncated taxpayer identification numbers (TTINs) on payee statements and certain other documents where not prohibited by the Internal Revenue Code, applicable regulations, or other guidance published in the Internal Revenue Bulletin, forms, or instructions. The regulations finalize the proposed rules issued in 2013 (REG-148873-09) with a few significant changes and make permanent a pilot program under Notice 2011-38 that is obsolete now that the final regulations have been published.

A filer is a person required to report a transaction (i.e., payment, distribution, or transfer) with another person, the payee. For example, the payee may be a payment recipient (i.e., Copy B of Form 1099-MISC, Miscellaneous Income), a plan participant receiving distributions (i.e., Copy B of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.), a transferor of real estate (i.e., Copy B of Form 1099-S, Proceeds From Real Estate Transactions), a payer of mortgage interest (i.e., Copy B of Form 1098, Mortgage Interest Statement), a debtor who has cancellation of debt income (i.e., Copy B of Form 1099-C, Cancellation of Debt), or a student receiving scholarships, grants, or qualified tuition (i.e., Copy B of Form 1098-T, Tuition Statement).

In addition, in a change from the proposed regulations, the final rules permit the use of a TTIN on any federal tax-related payee statement or other document required to be furnished to another person unless prohibited by the Code, regulations, or other guidance published in the Internal Revenue Bulletin, forms, or instructions. The proposed regulations had provided that use of a TTIN was permitted only when affirmatively authorized by the IRS. This change allows the use of TTINs to be expanded without imposing an administrative burden on the IRS to keep updating lists to track every authorized use.

Over the past few years, the AICPA has urged the IRS to make the taxpayer identification number truncation initiative permanent, as opposed to remaining a pilot program.

A TTIN is an individual’s Social Security number (SSN), individual taxpayer identification number (ITIN), or adoption taxpayer identification number (ATIN) that is truncated by replacing the first five digits of the nine-digit number with X’s or asterisks. In a change from the proposed rules, it also includes employer identification numbers (EIN). The use of a TTIN is allowed on electronic payee statements as well as paper payee statements.

While filers are permitted to truncate numbers on payee statements, it does not permit them to truncate numbers on forms filed with the IRS, such as Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under Sec. 6048(b)). It also does not allow the use of a TTIN on Form W-2, Wage and Tax Statement, because Sec. 6051(a)(2) requires that form, when furnished to employees, is required to show the name of the employee “and his Social Security account number.”

Under the rules, a person cannot truncate its own taxpayer identification number on any tax form, statement, or other document that person furnishes to another person. For example, a person may not use a TTIN in place of the TIN on a Form W-9, Request for Taxpayer Identification Number and Certification. This means also that an employer cannot use a TTIN in place of its EIN on a Form W-2 that the employer furnishes to an employee.

The final regulations also clarify that using a TTIN as permitted in the regulations will not result in any penalty (e.g., a Sec. 6722 penalty for failure to timely furnish a correct statement) for failure to include a taxpayer identifying number on any payee statement or other document.

The amendments to the specific information reporting regulations are generally effective for payee statements due after Dec. 31, 2014. Taxpayers were allowed to rely on the rules in the proposed regulations prior to publication of the final regulations.