In a bid to curb taxpayer and tax preparer fraud, the IRS has introduced a new procedure for the preparation of W-2 Forms for taxpayers who use Individual Taxpayer Identification Numbers (ITINs), as opposed to a Social Security Number. Effective from 2011 onward, W-2 Form preparers will need to fill out these Taxpayer Identification Numbers (TINs) manually. Prior to this, the common practice involved having the W-2 Forms filled out electronically either by tax software or payroll software. However, the IRS noted a lot of fraud with the automated process from some questionable tax preparers and at times, from the taxpayers themselves. The IRS made this change of procedure in April 2011, based on its powers under Rev. Proc. 2007-40.

Who Use the ITIN?

The ITIN is given to individuals who do not have a Social Security number and who are not qualified to get a Social Security Number, but are taxpayers. The ITIN is used instead of the Social Security number in W-2 Forms.

What is the Nature of the Number?

The ITIN starts with the number 9 and is a nine digit number. The 4th and 5th slots of this number have numbers that ranged from 70 to 88 only. However, from April of 2011, the IRS increased the range of this fourth and fifth slot to include numbers in the range of 90 to 92 and 94 to 99. This range enables easy identification of the ITIN.

What are the Consequences of Non-Compliance?

According to the IRS, employers and other W-2 preparers may lose their access to e-filing, which will pose an even more complicated situation for these employers, as this may mean manual filing of all W-2 Forms. Failure to follow this rule when preparing W-2 Forms may also lead to a written reprimand from the IRS.

How will Employers Accommodate the Rule?

Tax experts are foreseeing a nightmare in the enforcement of this new rule. Payroll software is usually hard-coded to automate the insertion of the ITIN as well as the Social Security numbers. Those who have purchased W-2 preparation software may therefore, need to consult with the software vendor to have the software skip the ITIN forms and have them listed for manual entry. Those who outsource the process of preparation of these forms may also have to communicate this with the company that handles this and have this process change documented.

What is the Way Forward?

Going forward, the IRS may continually introduce new rules as it works to curb an increasing trend of taxpayer identity and information theft. This may continually impact on the various payroll systems that employers use to automate the preparation processes. Employers therefore, need to factor in such updates and changes when planning their payroll processes.