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IRS allows more truncated tax ID numbers

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As we continue to deal with the coronavirus pandemic, everyone is thinking about masks.

The Internal Revenue Service, however, has been working on masking rules for a while and, coincidentally in this year of COVID-19, has taken steps to offer added protection for taxpayers.

The IRS masks are not literal covers. In fact, they lessen, not add.

But the reductions will mask — that is, make it more difficult to see — personal and business identification numbers and information on common tax documents.

And that should help reduce tax identity theft.

Last four Social Security digits: This summer, the IRS finalized rules that now allow employers to truncate their employees' Social Security numbers (SSNs) on W-2 forms sent to workers next year.

Those earnings documents for salaried employees — W-2 Copies B and C — previously have included employees' full, nine-digit identifying numbers.

W-2_2020_tax-year_Copy-C

Starting next year, the W-2 copy sent to workers can show only the recipients' last four SSN numerals. FYI, that issuance date for 2021 is Feb. 1 instead of the usual Jan. 31 deadline, since that normal deadline next year falls on Sunday.

Not required, but likely: The shift to a Truncated Taxpayer Identification Numbers, or TTINs, isn't a requirement. The IRS says in its final rule that the abbreviated numerical identification that allows for the masking of the first five digits is voluntary for employers.

The decision also notes that workers' full SSNs still must be listed on the W-2 copies of the form that employers send to the Social Security Administration.

But if your employer uses a payroll service, expect to see XXX-XX-1234 or ***-**-1234 instead of your full SSN in box a of your 2020 W-2. The companies that handle a lot of pay requirements, including annual tax statements, for lots of companies likely will make the change to their software for all their clients.

Good taxpayer safety move: Even though the option to use TTINs on employee W-2 copies isn't mandatory, it's still a positive security step.

As noted, it's likely to become the norm, starting with payroll administration firms.

Where companies continue to use the U.S. Postal Service to deliver tax documents to workers, and yes, that still happens despite the continuing shift to electronic employee communications, it will hamper potential identity thieves. The crooks won't be able to get a person's full numerical ID by stealing their W-2 from their curbside snail mail box.

And as for those W-2s sent to workers electronically, it will make those digital documents a little less appealing to hackers.

Transcript masking also expanded: On Nov. 13, the IRS took another security step, announcing that next month it will begin masking additional sensitive businesses data on tax transcripts.

The expanded business tax data masking follows the agency's move two years ago to hide sensitive data on individual tax transcripts.

A tax transcript is a summary of a tax return. These documents often are used by tax professionals to prepare prior year tax returns or represent the client before the IRS. Taxpayers use them when they need to recreate their personal tax records.

And tax transcripts are used regularly by lenders seeking verification of loan applicants' employment and income information.

Many tax ID numbers to be truncated: This latest masking move, which will begin on Dec. 13, means that business tax transcripts now will show the:

  • Last four digits of any Employer Identification Number listed on the transcript, for example, XX-XXX1234;
  • Last four digits of any Social Security number or Individual Tax Identification Number listed on the transcript, for example, XXX-XX-1234;
  • Last four digits of any account or telephone number;
  • First four characters of the first and last name for any individual (first three characters if the name has only four letters);
  • First four characters of any name on the business name line;
  • First six characters of the street address, including spaces; and
  • All money amounts, including wage and income, balance due, interest and penalties.

For both the individual and business tax transcript, there is space for a Customer File Number. This is an optional 10-digit number that can be created, usually by third parties, that allow the transcript to be matched to a taxpayer.

The Customer File Number field will appear on the transcript when that number is entered on Line 5 of Form 4506-T, Request for Transcript of Tax Return, and Form 4506T-EZ.

Form 4506-T excerpt
Excerpt of Form 4506-T, transcript request


What a taxpayer will see:
If you are using a transcript to show a lender your income, the IRS has detailed how the new making method will affect you.

  1. The lender will assign the 10-digit Customer File Number (for example, a loan number) to the Form 4506-T. The Form 4506-T may be signed and submitted by the taxpayer or signed by the taxpayer and submitted by the lender.
  2. The lender seeking the transcript will assign a Customer File Number, which can be any number that is NOT the loan applicant's Social Security number, on the Form 4506-T. That file number will appear on the transcript that the IRS will issue.
  3. Once received by the requesting lender, the transcript's Customer File Number serves as the tracking number to match it to the taxpayer.

Yes, it's more numbers, but the new figures won't be the nine SSN digits that are key in identity theft cases.

And the IRS' recent masking moves to protect taxpayer identification numbers on W-2 forms and data on business transcripts earn these documents the focus of this week's Tax Form Tuesday.

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