IRS extends trial program to combat identity theft

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in Small Business Tax

The IRS has announced it is extending and tweaking a pilot program designed to cut down on identity theft. (IRS Notice 2011-38)

Strategy: Follow the new guidelines. It allows you to use a truncated ver­sion of taxpayer identification numbers (TINs) when your business issues certain statements and 1099s.

Generally, the IRS requires returns, statements and forms to be filed for distributions to payees during the year. Form 1099 must be filed for independent contractors receiving more than $600 in 2011. The statements are generally due by Jan. 31 of the following year.

Typically, the statement includes an ID number for the payee such as the TIN or Social Security number. These nine-digit numbers use the xxx-xx-xxxx format. Naturally, these numbers are confidential and sensitive.

To counteract potential problems, the IRS initiated the pilot program in 2009. (IRS Notice 2009-93). It authorized filers of certain information ­returns to truncate the ID number on Forms 1098, 1099 and 5498. The new Notice extends the program for paper statements furnished for 2011 and 2012. It also excludes Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, because the IRS considers the form to be an acknowledgment needed for charitable deductions.

The program is available if:

  • The identifying number is a Social Security num­ber, IRS individual taxpayer identification number or IRS adoption taxpayer identification number.
  • The identifying number is truncated by replacing the first five digits of the nine-digit number with asterisks or Xs.
  • The truncated identifying number appears on a paper payee statement (including substitute and composite substitute statements) in the Form 1098 series (excluding Form 109-C), the Form 1099 series or the Form 5498 series for 2011 and 2012.

Tip: Truncation of employer identification numbers (EINs) isn’t permitted.

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