IRS finalizes rules for truncating taxpayer SSNs on W-2s

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The Internal Revenue Service has issued final regulations for allowing employers to truncate taxpayer identification numbers on wage and tax statements to help protect employees from identity theft.

The regulations allow employers to voluntarily truncate employees’ Social Security Numbers on copies of the Form W2, Wage and Tax Statement, furnished to employees so the truncated SSNs appear in the form of IRS truncated taxpayer identification numbers. The regulations also clarify the application of the truncation rules to Forms W-2 and add an example illustrating the application of the rules.

The IRS issued a set of proposed regulations for truncating taxpayer identification numbers in 2017 and finalized the regulations last week (see IRS proposes rules for truncated SSNs on W-2 forms).

The IRS largely adhered to the proposed regulations, but made a few changes in response to the comments it received. While many of the comments recommended adopting the proposed rules, several commenters disagreed with the proposals. Some of them complained that not including a complete SSN on the Form W-2 would make it difficult for employees to verify that the SSN appearing on their copy of their W-2 that is filed with the Social Security Administration and the IRS is correct, would make it difficult for employees to identify and correct mistakes in their lifetime earnings, would make it more difficult for tax preparers to verify that the taxpayer has provided the correct SSN, might make it more difficult for employees to provide proof of income to lenders, and would confuse employees who receive multiple Forms W-2, some with truncated SSNs and others with complete SSNs. However, the Treasury and the IRS didn’t adopt these comments and they gave the reasons why in the final document.

Only one state submitted a comment on its ability to process Forms W-2 with truncated SSNs, and that comment supported the adoption of the proposed rules. At the request of several state tax administrators, though, the proposed rules provided that the applicable date would not be earlier than Dec. 31, 2018, to give states enough time to make the necessary changes to their systems. The final regulations provide that these rules apply to returns, statements, and other documents required to be filed or furnished after Dec. 31, 2020.

In general, the final regulations are fairly flexible, allowing employers to truncate or not truncate employees’ Social Security numbers on the W-2. Some commenters had speculated that state or local governments might prevent truncation on the copy of the Forms W-2 submitted to the state. “That may be true, but other state and local governments may allow truncation,” said the final regulations. “Truncation, and the identity protection benefits associated with truncation, should not be prohibited for all employees because some state and local governments may not allow truncation. The permissive nature of the rules accommodate the restrictions of individual states. Similarly, the rules accommodate potential burdens imposed on employers by making truncation optional. If employers with employees in multiple states find the process too burdensome, they may choose not to truncate. The Treasury Department and the IRS determined that there is a benefit in allowing for truncation because it will benefit the employees of employers who choose to take advantage of it after considering applicable state and local government rules.”

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Tax regulations Identity theft protection Tax forms Payroll IRS