IRPAC General Report
Expand Use of TIN Matching Program to Improve Information Reporting Accuracy
1. IRPAC again recommends expansion of the TIN Matching Program to include filers of all nonwage information returns to which incorrect-TIN penalties under IRC §§ 6721 and 6722 apply. This will (1) reduce IRS administrative costs; (2) increase the amount of valid data available for IRS tax return fraud prevention, identification of underreporters, and discovery of identity theft; and (3) eliminate a significant burden on information return filers who have been barred from performing TIN validation prior to IRS filing.
2. IRPAC recommends that the IRS amend Revenue Procedure 2003-9 to provide that after filing an information return other than those types potentially subject to backup withholding, the filer may check the TIN furnished by the payee (or other recipient) against the name/TIN combination contained in the IRS TIN Matching database and receive TIN validation information. This will permit information return filers to request correct TINs to replace non-validated TINs and report the newly obtained TINs on corrected information returns in time to reduce filers’ penalty exposure, and in time to reduce administrative costs for the IRS.
3. IRPAC recommends that the IRS issue a Notice announcing relief from IRC § 6721 and § 6722 incorrect TIN penalties for all nonwage information return types that the TIN Matching Program may not be used to validate payee/recipient TINs.
4. IRPAC recommends that the IRS add a checkbox to Form W-9 and Form W-4P which can be checked by the payee to indicate that the payee gives the payer permission to submit the payee’s name and TIN to the IRS TIN Matching Program for validation.
5. IRPAC recommends that the IRS develop and offer a new premium-level TIN Matching service (in addition to maintaining the current basic TIN Matching Program). The new premium-level service would require an enrollment fee paid to the IRS, and would process bulk files submitted through the information return filer’s account on the IRS secure site for information return filing.
The TIN Matching Program provided by the IRS is currently limited to use by filers of information return types to which backup withholding may apply. The filers of many more information return types that are not subject to backup withholding bear a substantial burden due to being barred from using TIN Matching for early identification of payee name-TIN mismatches. Deprived of TIN Matching, these filers have no means of identifying incorrect TINs in their records until they receive IRS Notice 972CG informing them that penalties under IRC §§ 6721 and 6722 will be assessed against them for having used those TINs on information returns filed to the IRS. These penalties are set by statute at $100 per information return, and $100 per recipient statement which is the copy of the information return furnished to the taxpayer named on the form, each with a cap of $1.5 million for a calendar year. Although penalty abatement is provided for under the reasonable cause regulations (Reg. § 301.6724-1) where the filer acted in a responsible manner and the TIN errors were due to the payee’s action in furnishing the incorrect TIN or name, the process for obtaining penalty abatement is lengthy, costly, complex and currently structured to require repeated rounds of written communication and submission of documentation to the IRS, frequently including appeals. The cost of just the first level of penalty notice response is illustrated by a Form 1098-T filer that received a notice listing 3,183 incorrect student TINs (12.7% of the total number filed, a typical rate for higher education where despite diligent efforts of the institution to initially solicit correct information, students have no incentive and little interest in furnishing the exact name/TIN combination used on their income tax returns). The penalty assessment was $318,300, for all of which reasonable cause for abatement was documented to the IRS, but at an expenditure of over 350 hours of work for just the initial response to the IRS which was required prior to announcement of the one-time reprieve for tax year 2011 Form 1098-T incorrect-TIN penalties. And although a new solicitation of the reportable name and TIN is a required part of the workload of filers who receive incorrect-TIN penalty notices, at best this results in the filer obtaining the correct name/TIN combination a year and a half after the original information return was filed to the IRS.
By contrast, if the filers currently excluded from TIN Matching could use the program prior to filing information returns with the IRS, they would contact the mismatched payees/recipients, obtain new information and file original information returns with correct name/TIN combinations that the IRS would use to timely prevent tax return fraud, uncover identity theft, and find underreporting of tax liabilities. In addition, the IRS would reduce administrative costs by producing and mailing fewer penalty notices, and working fewer incorrect-TIN penalty cases.
IRPAC first recommended expansion of the TIN Matching Program in 2002. At various times expansion was proposed by the Department of Treasury and recommended by the National Taxpayer Advocate. Expansion was written into federal legislation which was passed by the Senate in 2004 but ultimately not enacted. In 2013, expansion of the TIN Matching Program was recommended by the IRPAC Burden Reduction Subgroup, Emerging Compliance Issues Subgroup, and Employee Benefits and Payroll Subgroup. In 2014, TIN Matching expansion was elevated to an IRPAC-wide issue on which the entire advisory committee has worked throughout the year. The need for expansion is widespread and will soon grow even larger when great numbers of new information returns required under the Affordable Care Act become subject to incorrect-TIN penalties without benefit of access to prefiling use of the TIN Matching Program. Moreover, U.S. individuals whose identities cannot be matched properly against the ACA-related Forms 1095-C or 1095-B will be at risk for receiving notices from the IRS relating to liability for individual shared responsibility payments.
Filers of Forms 1099-B, 1099-DIV, 1099-INT, 1099-K, 1099-MISC, 1099-OID and 1099-PATR are permitted to use the TIN Matching Program. The IRS does not currently permit TIN Matching for a longer list of information returns including Forms 1098 (mortgage interest), 1098-T (tuition statement), 1099-R (distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance contracts, etc.), 5498 (IRA contributions), 1099-G (government payments), 1099-S (proceeds from real estate transactions), 1042-S (foreign person's U.S. source income subject to withholding) – which represent over 400 million forms projected to be filed for 2014 (per Publication 6961) and that is only some of the form types shut out of TIN Matching under current rules. Hundreds of millions more information returns subject to incorrect-TIN penalties but excluded from TIN Matching will be added with the filing of the new Forms 1095-B (health coverage) and 1095-C (employer provided health insurance offer and coverage).
Discussion of Recommendation 1: Expand the TIN Matching Program to include filers of all nonwage information returns to which incorrect-TIN penalties under IRC §§ 6721 and 6722 apply. This will reduce IRS administrative costs, increase the amount of valid data available for IRS tax return fraud prevention and identification of underreporters, and eliminate a significant burden on information return filers who have been prohibited from performing TIN validation prior to IRS filing. IRPAC has engaged in numerous discussions with the Office of Chief Counsel regarding what constitutes disclosure of return information for purposes of IRC § 6103, and while there is not complete agreement either within IRPAC or with the personnel with whom IRPAC has discussed these matters, IRPAC acknowledges and supports the need to protect taxpayer information. Authority for regulations expanding TIN Matching exists in IRC § 7805 which provides that, “the Secretary shall prescribe all needful rules and regulations for the enforcement of this title …”
Discussion of Recommendation 2: Amending Revenue Procedure 2003-9 to provide that after filing an information return other than those types potentially subject to backup withholding, the filer may check the TIN furnished by the payee (or other recipient) against the name/TIN combination contained in the IRS TIN Matching database and receive TIN validation information. This will permit information return filers to request correct TINs to replace non-validated TINs and report the newly obtained TINs on corrected information returns in time to reduce filers’ penalty exposure, and reduce administrative costs for the IRS. These filers would go through the same strict, multi-part registration process as all other users of the TIN Matching Program and certify the same pledge of confidentiality and proper use of TIN Matching. IRPAC appreciates the discussions with the Office of Chief Counsel which clarified that disclosure issues do not arise post-filing. And though it may seem onerous to file a year’s information returns, then file corrected information returns as soon as the originally filed name/TIN combinations can be matched and the non-validated TINs identified and replaced with correct TINs, filers will use this alternate procedure because it will lessen their penalty exposure; while the IRS will reap the benefits of having additional valid information in time for identification of underreporters, as well as reducing the number of penalty notices required to be produced, mailed and worked in the following years.
Discussion of Recommendation 3: Provide penalty relief from IRC § 6721 and § 6722 incorrect TIN penalties for all nonwage information return types for which the TIN Matching Program may not be used to validate payee/recipient TINs. With higher volumes and higher costs to the IRS and to information return filers, TIN Matching is no longer an attractive “extra,” but rather is a necessity for information reporting compliance. Until such time as TIN Matching expansion is effected, penalties for incorrect name/TIN combinations should be waived for all forms for which the TIN Matching program is unavailable. A penalty waiver need not be viewed as a giveaway to filers, nor as an invitation to noncompliance, because applicable penalty relief could be conditioned on a filer’s re-solicitation of the correct TIN from the affected name-TIN mismatched taxpayers.
Discussion of Recommendation 4: Add a checkbox to Form W-9 and Form W-4P which the payee/recipient can check to specifically authorize the payer/filer to validate the payee name and TIN through the IRS TIN Matching Program. This direct authorization by the payee/recipient, on a form which would be kept on file by the payer, would meet the requirement of IRC § 6103(c) for disclosure of return information to a designee of the taxpayer, and permit use of the TIN Matching Program by filers of returns other than those to which backup withholding could apply.
Discussion of Recommendation 5: Develop and offer a new premium-level TIN Matching service (in addition to maintaining the current basic TIN Matching Program for which no fee is charged). The new premium-level service would require an enrollment fee paid to the IRS, and would process bulk files submitted through the information return filer’s account on the IRS secure site for information return filing. Just as the Social Security Administration receives a fee for its premium service (the CBSV), the IRS would gain fee income from premium TIN Matching which, it is anticipated, would primarily be used by large-volume information return filers. Further, and perhaps more importantly, large-volume information return filers tend to generate the largest number of name/TIN mismatches (and accompanying penalty assessments that are expensive to challenge for abatement due to reasonable cause), so a new premium-level service would enhance effective tax administration.