In its continuing effort to reduce identity theft, the IRS issued final regulations that permit employers to use truncated taxpayer identification numbers (TTINs) on Forms W-2, Wage and Tax Statement, issued to employees (T.D. 9861). The regulations finalize proposed rules issued in September 2017 with no substantive changes in response to comments (REG-105004-16). Permissible TTINs are Social Security numbers (SSNs) with the first five digits of the nine-digit number replaced with asterisks or XXXs in the following formats: ***-**-1234 or XXX-XX-1234.
The new rules were authorized by an amendment to Sec. 6051(a)(2) made by the Protecting Americans From Tax Hikes Act, P.L. 114-113, which replaced the words “social security account number” of the employee with the “identifying number for the employee” in the list of information required to be on Form W-2. Although this change was effective on the date of enactment, Dec. 18, 2015, the IRS is delaying the effective date of the final regulations to statements required to be furnished after Dec. 31, 2020.
To ensure accurate wage information is received by the Social Security Administration, the regulations do not permit TTINs on Forms W-2 that are being sent to that agency or to the IRS. They are also not allowed on Forms W-2 being provided on a statement furnished to the employer of a payee who received sick pay from a third party, because Sec. 6051(f)(1)(A)(i) specifically requires the statement to contain the employee’s SSN.
But TTINs may be used on Forms W-2 being provided by employers to employees that report third-party sick pay because that is permitted by statute. Truncated numbers may also be used for reporting wages paid in the form of group term life insurance.
The IRS received a number of comments about the proposed rules, most of them positive and suggesting the rules be adopted as is. One of the negative comments noted the possibility that taxpayers might find it difficult to verify if the forms contain correct information and tax return preparers would find it difficult to verify taxpayers’ correct SSNs. The IRS thinks the benefits of protecting taxpayers from identity theft outweigh any difficulties that may be encountered, and notes that having taxpayers’ names and addresses on the forms will make it easy to identify whose they are.
Another comment addressed the possibility that state tax authorities may not adopt similar truncation rules. The IRS believes that making truncation optional will permit employers to choose to use it only If the states to which they must furnish Forms W-2 also permit truncation, lessening the burden on employers.
In 2014, the IRS issued final regulations (T.D. 9675) that allow the use of TTINs on certain payee statements, such as those associated with forms in the 1099 series and other documents.
— Sally Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.