Fighting Tax Fraud, IRS Proposes Use of Truncated Tax ID Numbers

January 10, 2013

In response to the growing problem of identity theft-related tax fraud, the IRS has proposed regulations to create a new taxpayer identifying number, known as the Truncated Taxpayer Identification Number (TTIN), that can be used instead of a Social Security number. 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. It does not include employer identification numbers. The IRS began testing the TTIN in a 2011 pilot program.

The TTIN program is voluntary. As filers of certain returns, colleges and universities will be permitted to identify an individual payee by use of a TTIN on the payee statement furnished to the individual (no truncated numbers are allowed on forms submitted to IRS). The TTIN can be used in payee statements on 1099-, 1098- and 5498-series forms, except for the 1098-C. The TTIN may not be used in Forms W-2, Wage and Income Statements.

Impact of Identity Theft in Federal Tax Administration

From 2008 through mid- 2012, the IRS identified more than 600,000 taxpayers who have been affected by identity theft. According to the IRS Advisory Council, in 2011 the IRS protected $1.4 billion in refunds from being erroneously sent to identity thieves. Through mid-April 2012, the IRS had stopped over 325,000 suspicious returns with $1.75 billion in claimed refunds by using filters specifically targeting refund fraud.

However, identity theft in the tax realm goes far beyond the amounts thus far detected and prevented by the IRS, according to the Treasury Inspector General for Tax Administration (TIGTA). TIGTA's analysis of tax returns has identified approximately 1.5 million tax returns with potentially fraudulent refunds totaling in excess of $5.2 billion. TIGTA estimates that unless measures are taken, the IRS could potentially issue $21 billion in fraudulent tax refunds over the next five years as a result of identity theft.

Comments on the proposed rules are due by February 20 and a public hearing has been scheduled for March 12.