2008 IRPAC General Report Appendix
2008 - 2009 Guidance Priority List Submission
May 28, 2008
Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2008-47)
1111 Constitution Avenue, NW
To Whom It May Concern:
The IRPAC is pleased to take this opportunity to submit the following three items for consideration and inclusion on the 2008-2009 Guidance Priority List. The first two items have been worked by IRPAC for a number of years. The last item was initiated last year with a recommendation made to the Commissioner at our October Public Meeting. We are hopeful that focused resources will be allocated to these issues so that guidance can be published to help clarify the ambiguity, promote compliance and help to curtail identity theft.
FORM W-9 RE-SOLICITATION
To obtain written guidance on whether Treas. Reg. § 31.3406(d)-1(b)(2)(iv)(A) requires an acquiring payor to resolicit taxpayer identification numbers ("TIN") from each affected account holder when it acquires accounts from a third-party payor who has been making reportable payments subject to the Form W-9 certification requirements. For purposes of this issue "acquires accounts" means accounts acquired by voluntary and involuntary means (e.g., merger and acquisitions, change of transfer agents, change of plan administrators for employee plans, etc.).
In past years (and today) it appears the industry practice in the financial services sector is not to resolicit certified TINs from account holders when their accounts are purchased/transferred from another payor. This practice is not based on published IRS guidance, although Treas. Reg. § 35a.9999-3 Q&A 101 allows it to the extent that regulation remains in force. In practice, it appears, the selling payor will "certify" to acquiring payor that the TINs on the sold/transferred accounts are accurate. In light of FAS 5 (accounting for uncertainties) and other recent regulatory changes which require potential tax liabilities to be disclosed, many financial services taxpayers are rethinking the industry practice since the regulation is not clear.
Many financial institutions are now choosing to undertake the costly and time consuming expense of re-soliciting Forms W-9 when accounts making reportable payments subject to the Form W-9 certification requirements are acquired. This action will protect the financial institutions from (a) making a tax liability disclosure that will most likely negatively impact the entity and (b) taking the risk that industry practice could be challenged in the future and subjecting the entity to IRS penalties and other accounting regulatory penalties.
Other Matters to be considered:
The IRS' determination will affect the B and C Notice requirements to the acquiring entity. If a Form W-9 is not required to be re-solicited, does the acquiring payor "step" into the same shoes as the selling payor?
- Publish written guidance (perhaps via an IRS Notice or through the forms and instructions) on this issue so taxpayers will have a clear understanding of their responsibilities when accounts paying interest and/or dividends are acquired.
- We recommend that the guidance provide :
- A certified TIN is not required to be solicited by the acquiring payor.
- The selling payor should provide the acquiring payor with written notification of all pre-1984 accounts and their corresponding TINS and all post-1983 accounts and corresponding certified TINs.
- With respect to B & C Notices, the acquiring payor will step into the shoes of the selling payor with respect to B and C Notice history.The selling payor will provide the acquiring payor with the 1st and 2nd B Notice history for each acquired account to enable the acquiring payor to properly use the 2 in 3 year rule.
- With respect to post acquisition B & C Notices, the selling payor is not required to forward B & C Notices received to the acquiring payor.
- Consideration should be given to the responsibilities of the selling payor when B & C Notices are received around the effective date for an acquisition.
QUALIFIED PAYMENT CARD AGENT PROGRAM
REG-163195-05 and proposed revenue procedure (Notice 2007-59)
The paper-based rules for reporting transactions under IRC section 6041 do not work well in an electronic environment. IRS and industry have spent many years developing modifications that provide the IRS with “payment card” transaction information but take into account industry structure and data flow. Revisions to and finalization of proposed guidance issued in 2007 is necessary before the industry can begin to implement changes required to meet the filing requirements.
Under IRC section 6041, anyone in a trade or business that pays a merchant at least $600 in a calendar year must file an information return. Regulations generally limit these requirements to payments for services and, except for federal government agencies, for payments to non-corporations (except medical and legal corporations.) These rules apply equally to payments by cash, check or credit card. However, these rules, including solicitation of TINs and backup withholding, were designed for a paper-based payment world and do not work in an electronic environment.
Industry has been working with IRS for many years to develop rules that would provide IRS with accurate information returns yet fit within the structure of the electronic payment industry. IRPAC first raised this issue in the fall of 1993. A white paper was issued in January 1996. In that paper IRPAC recommended, among other things, that an exception from backup withholding be provided.
IRS finally put the project on its 2002-2003 business plan and issued proposed regulations in January 2003 along with a notice of proposed revenue procedure. Together the regulations and revenue procedure provided rules for the “Qualified Payment Card Agent” (QPCA) program whereby a card organization could enter into an agreement with IRS to TIN match its merchants’ data and regularly provide that data in reports to cardholders to be used in filing information returns. In return, a limited exception from the backup withholding rules was provided.
The guidance was finalized in 2004 (T.D. 9136 and Rev. Proc. 2004-42) but the program has yet to be implemented. Problems with the requirements made it impossible to implement the program. IRS agreed to revisit the requirements and in July 2007 issued new proposed regulations and a new proposed revenue procedure. A hearing was held in November 2007.
The main issues to be resolved at this point are the standards for use of electronic delivery of the required reports, and the “opt-out” procedures for merchants. IRS has been very cooperative through this long journey toward issuance of workable rules, but
since the hearing, the project appears to have been set aside. In the meantime, another year is passing without workable rules for electronic payments under IRC section 6041. It is critical that work resume and the guidance finalized.
Finalization of REG-163195-05 and the proposed revenue procedure (Notice 2007-59) should be placed on the 2008-2009 Guidance Priority List so that the QPCA program may be activated as soon as possible.
MASKING TINs on INFORMATION RETURNS
Filers are required to send statements to payees showing name, address and social security number. The payee statements are mailed in an envelope with the legend “Important Tax Document Enclosed”. This combination is an invitation to identity theft, an issue of great concern to both payors and payees. Last year IRPAC recommended the IRS continue to study the concept of masking TINs on information returns. Based on additional discussions with the Service during 2008, IRPAC is recommending the Service permit filers to mask the TIN by using only the last four digits.
In an effort to combat the rising problem of Identity theft, the ultimate recommendation is to have the recipient's taxpayer identification number (TIN), masked on all information returns that are sent to the payee. (i.e. Forms 1099, 1098, 5498, and W-2). This would be a pro-active measure towards aiding privacy and thwarting identity theft efforts. We believe this proposal will satisfy all purposes of information reporting with no harm to IRS processing or the filing of tax returns, and will greatly benefit the taxpayers by reducing the likelihood of identity theft.
The Office of Privacy is working on several projects that identify usage of taxpayer identification numbers in an effort to reduce the usage of these numbers on IRS correspondence. The service has started masking TINs (by only using the last four digits of a TIN) on several types of correspondence. The recommendation to allow payers to mask the tax payer identification number on information returns mailed to recipients would fit in nicely with the current activity being undertaken by the Office of Privacy and this concept is fully supported by the Office of Privacy. The Office of Privacy has agreed take ownership of this recommendation.
Section 6109 of the IRC requires provision of identifying numbers when required by the Secretary. IRC 6109(a)(1). (emphasis added.) For this purpose, for individuals the
identifying number is the individual’s social security number. Subsection (d) further states that the social security number shall be used “except as shall otherwise be specified under regulations.” As a result, the consensus of the Modernization subgroup is that since the use of an identifying number is left to the Secretary, IRS could deem use of the last four digits to meet the requirement in section 6109 through issuance of guidance by IRS. and that no legislative changes are needed.
Financial institutions would like to see this happen as soon as possible; the earlier the better. If done by August some may be able to make the change for the 2008 filing season.
Add to the IRS Guidance Priority List a project to develop guidance which would allow filers to display only the last 4 digits of the tax payers identification number on Forms 1099, 1098, 5498, and W-2 sent to the recipient beginning with the 2008 tax year reporting.
Should you have any questions after reviewing any of these issues, please do not hesitate to contact me. I can be reached at (610)503-6770 or by email at Karen_Botvin@Vanguard.com.
Thank you in advance for your interest in IRPAC and its issues.
2008 IRPAC Chair