Yesterday, the IRS released final regulations that aim to prevent identity theft by permitting, but not requiring, employers to truncate the taxpayer identification numbers (TINs) on copies of Forms W-2 and Forms W-2c furnished to employees.  The regulations finalize proposed rules issued in 2017.  Generally, this rule applies to Forms W-2 required to be filed or furnished after December 31, 2020, so employers still have time to decide whether to implement the change.  The delayed effective date is intended to allow states and local governments time to update their rules to permit the use of truncated TINs, if they do not already do so.

The TIN for most individuals (and all employees whose income is required to be reported on Form W-2) is his or her social security number (SSN); therefore, instead of including an individual’s full nine-digit SSN, the final rule permits employers to truncate this sensitive personal identifying information.  In place of the full SSN, employers may use a truncated TIN, which is in the format of XXX-XX-#### or ***-**-#### with the #’s replaced by the final four digits of the employee’s social security number.  Full TINs are still required on copies of Form W-2 filed with the Social Security Administration, however.  In addition, payers of third-party sick pay must include full TINs on statements to employers of employees to whom the third-party paid sick pay.  However, truncated TINs may be used on Forms W-2 that report third-party sick pay issued by employers to employees.

This final regulation is consistent with other rules promulgated by the IRS nearly five years ago and a pilot program announced in Notice 2009-93 a decade ago.  The pilot program was subsequently extended in Notice 2011-38 before proposed regulations regarding truncated TINs were issued in 2013.  Under that series of guidance, filers were permitted to truncate TINs on most information returns provided to payees, including Form 1095-C, as well as the Form 1098 series (except Form 1098-C), the Form 1099 series, and the Form 5498 series, but were not permitted to use a truncated TIN on Forms W-2.  Because section 6051 historically required that “the social security account number” of the taxpayer to be reported on the form, the IRS did not permit truncated TINs to be used on Forms W-2.  However, the Protecting Americans from Tax Hikes (PATH) Act replaced “social security account number” with “identifying number for the employee” in the statute.

The IRS considered comments from a number of stakeholders in considering whether to make changes to the proposed regulations.  Several commenters stated that not including a complete SSN on Forms W-2 will create difficulties; for example, it was argued that using truncated TINs will make it difficult for employees to verify the accuracy of the TIN filed with the SSA and IRS and to identify and correct mistakes in lifetime earnings.  Commenters also warned against the use of truncated TINs, which they argued would confuse employees that received multiple Forms W-2, some with truncated TINs and some without.  However, the Treasury Department and IRS did not adopt these comments, explaining instead that the benefit to employees outweighs the risk of any unintended consequences that might occur, many of which could be mitigated.

Email this postTweet this postLike this postShare this post on LinkedIn
Photo of James Damon James Damon

James Damon is an associate in Covington’s Washington, DC office, where he practices with the firm’s Employee Benefits and Executive Compensation Practice Group.

Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.