Confidentiality of the Taxpayer Identification Number under the Internal Revenue Code

Confidentiality of the Taxpayer Identification Number under the Internal Revenue Code

Confidentiality of the Taxpayer Identification Number under the Internal Revenue Code

September 28, 1999 (RL30323)

Contents

Background

TINS on Taxpayer's Return

TINs to Third Parties

Permissible Disclosures

Penalties for Disclosure

Penalties for Failing to Disclose

Tables

Table 1. Requirements to Furnish TINs on Taxpayer's Return

Table 2. Requirement to Furnish Taxpayer's TIN to Another Party

Table 3. Examples of Persons to Whom IRS Can Disclose Taxpayer Return Information

Summary

Section 6109 of the Internal Revenue Code makes an individual's Social Security number the individual's taxpayer identification number [TIN]. The same section requires taxpayers to furnish their TINS to the Internal Revenue Service and to other persons whenever the Internal Revenue Service determines that securing the proper identification of the person is necessary. Many Code sections require taxpayers to collect and furnish the TINS of third-parties with whom they have dealings in order to claim a benefit or a deduction. The first part of this report compiles instances in which individuals must furnish their TINS or the TINS of another person in order to file their tax return. The second and third parts examine the times when a taxpayer must furnish a TIN to a third party and the times when the Code permits disclosure of tax return information (which usually contains the TIN) to other parties. The last part discusses penalties for improper disclosure of tax return information and penalties for failing to disclose a TIN when required to furnish it.

Confidentiality of the Taxpayer Identification Number under the Internal Revenue Code

Background

In October 1961, Congress authorized the Internal Revenue Service to require identifying numbers on tax returns.¹ Fifteen years later, the Tax Reform Act of 1976² codified IRS practice that the Social Security number was to be used as the identifying number for individuals. Since that time Congress has adopted many provisions which require individuals to furnish their TINs or the TINs of other persons with whom they have dealings in order to claim a tax benefit or to enable the IRS to match returns with information reports in order to verify claims on returns. This report is intended to illustrate the wide variety of situations in which individuals are required by the Internal Revenue Code to furnish their taxpayer identification numbers, either to the IRS or to third parties.

TINS on Taxpayer's Return

The table below lists Code sections which require taxpayers to furnish either their TIN or another person's TIN on their individual tax returns.

Table 1. Requirements to Furnish TINs on Taxpayer's Return

Whose TIN

Why Required

Taxpayer's

IRC § 6109; 26 CFR §301.6109-1
Identify taxpayer's return

Taxpayer's spouse's

IRC § 6012; 26 CFR §301.6109-1
Joint return requirements
IRC § 151 Personal exemption

Taxpayer's dependents'

IRC § 23 Adoption tax credit
IRC § 24 Child tax credit
IRC § 25A Hope Scholarship and Lifetime learning credits
IRC § 32 Earned income credit
IRC § 151 Dependency exemption

Child care provider's

IRC § 21 Child care tax credit
IRC § 129 Dependent care assistance program income exclusion

Tax preparer's

IRC § 6109(a)(4)³

Parent's (if taxpayer is
child under age 14)

IRC § 1(g) Minor child with unearned income is taxed at rates determined by parents' income

Former spouse's

IRC § 215(c) Alimony deduction

TINs to Third Parties

In a wide variety of situations, the Internal Revenue Code requires taxpayers to give their TINs to third parties. Often the requirement is deemed necessary in order to permit the IRS to match the income and deduction side of the same transaction or to verify that the proper tax rates were used or the proper amount of tax was withheld or reported. The more persons with whom a taxpayer may be doing business or from whom a taxpayer may be receiving income the more persons there will be who are entitled to know a taxpayer's TIN.

Recently, there has been recognition that in some instances having to provide a TIN may make one vulnerable to identity theft.⁴ Beginning with returns prepared after 1999, individual tax return preparers are permitted to request an alternative "Preparer Tax Identification Number" for use when preparing tax returns. Although there is no pending legislation to extend this idea to other taxpayers, this does provide a precedent for individuals having a public and a private TIN.

Table 2 below emphasizes the number of taxpayers who are required to furnish their TIN to third parties for a variety of purposes.

Table 2. Requirement to Furnish Taxpayer's TIN to Another Party

Who Provides

To Whom

When

Why Required

Parent

Child under age
14 with unearned
income

If child's income not reported on parent's return, in time to file return

IRC § 1(g) Minor child with unearned income is taxed at rates determined by parents' income

Alimony
recipient

Former spouse

In time for taxpayer
to file return

IRC § 215(g) To verify alimony income compared to alimony deduction

Child care
providers

Customers of child
care providers

In time for customers
to file return

IRC § 21 Child care tax credit
IRC § 129 Child care assistance program provider

Medical
Savings
Account
holder

Trustee of medical savings account

When account
opened

IRC § 220(j)(4) Reporting by MSA trustees

Seller of
real property

Buyer of real
property

At time of sale of
residence worth more
than $300,000 or sale
of nonresidential property

IRC § 1445(b) If seller's TIN not furnished, buyer must withhold 10% of amount realized

Seller of real property

Buyer of real
property if seller provides financing

Buyer deducting
interest includes
seller's TIN on return

IRC § 6109(h) Requires taxpayers claiming a deduction under IRC § 163 for qualified residence interest where seller provided financing to include seller's TIN on return

Employee

Employer

On employment

IRC § 6109; IRC §§ 3101, 3102, 3111 To withhold Social Security taxes;
IRC § 3402 Income taxes;
IRC § 3301 Unemployment taxes; IRC § 6051 Statements of withholding to employees;
IRC § 6039D Participants in fringe benefit plans;
IRC § 6057 Participants in ERISA plans;
IRC § 6053 To report tips;
IRC § 6060 Where employee is income tax return preparer

Recipients of certain wage equivalents

Payers

At time of request for withholding of income taxes

IRC § 3401(o) Recipients of sick pay, certain annuities, or supplemental unemployment compensation can request withholding from third-party payer of benefit

Gamblers

Payers of
winnings

On winning

IRC § 3402(q) Payers of certain gambling winnings are required to deduct and withhold

Pension
recipients

Payers

Before payment

IRC § 3405 Requires withholding unless recipient elects out; no election out permitted unless recipient furnishes payer with TIN

Interest
recipients

Payers, e.g.
banks

On opening account

IRC § 3406 Back-up withholding required if TIN not furnished; IRC § 6049

Dividend
recipients

Payers of
dividends

On opening account,
stock purchase

IRC § 3406 Back-up withholding if TIN not furnished; IRC § 6042(a), 6044

Other
income
recipients

Payers of
income

Various

IRC § 3406 Back-up withholding if TIN not furnished:
IRC § 6041 Payments of $600 or more made by a trade or business;
IRC § 6041A Payments of $600 or more made by a trade or business for services rendered to the business;
IRC § 6041A Transfers of goods worth $5,000 or more to direct sellers;
IRC § 6045 Returns of brokers, middlemen, real estate persons;
IRC § 6050A Fishing boat operators must report shares of the catch;
IRC § 6050N Payers of royalties;
IRC § 6050Q Payers of long-term health care benefits must report TIN of insured and TIN of individual recipient

Applicants for
U.S. passport

IRS

Application

IRC § 6039E

Applicants for permanent resident status

IRS

Application

IRC § 6039E

Persons abandoning
U.S. citizenship

IRS

Time of renunciation

IRC § 6039G

Purchasers
using cash payments
greater than $10,000

Recipients of
more than $10,000
in cash, including
from persons
posting bail

At time of payment

IRC § 6050I Requires reporting receipt of payments aggregating more than $10,000 in cash to IRS

Donors of more than $5000 of property

Donee

Prior to sale of
property by donee

IRC § 6050L requires donees who sell donations within two years of receipt to report donor's TIN to IRS

Contractors
with federal government

Head of federal executive agency

Entry into contract

IRC § 6050M requires reporting of TIN of every person with whom the agency enters a contract during the year

Mortgagors

Mortgage holder

Entry into contract

IRC § 6050H requires mortgagees receiving $600 or more of interest to file annual return with IRS and mortgagor

Debtors

Financial entities
and government
agencies

When debt of $600
or more is canceled

IRC § 6050P requires reporting cancellation of indebtedness of more than $600

Students and parents

Educational
institution, student
loan providers,
tuition plans

On enrollment

IRC § 6050S requires reporting of higher education tuition and related expenses

Taxpayer who
pays return preparer

Tax return
preparer

In order to prepare
return

IRC § 6107 requires return preparers to keep a list of name and TIN of taxpayers whose returns they prepare

Tax return preparer

Taxpayer

On return

IRC § 6107, 6109(a)(4)⁵

Partner

Partners

For returns

IRC §§ 6229(e); 6230(e)

Permissible Disclosures

The Internal Revenue Code contains stringent penalties for disclosing taxpayers' returns and taxpayer return information. Consequently, the law is fairly explicit about when taxpayer return information may be disclosed and to whom. Most of the disclosure authority is contained in IRC § 6103. The following chart contains examples of instances in which taxpayers' returns, and thus their TINs, might be disclosed to other entities by the IRS. In many of these instances, however, the recipient of the return information may already have the taxpayer's identification number. In fact, the recipient may be required to identify the taxpayer by number in order to receive the requested return. The chart does not list the many entities that are entitled to statistical information which can only be produced in an anonymous form which does not identify a particular taxpayer directly or indirectly.

Table 3. Examples of Persons to Whom IRS Can Disclose Taxpayer Return Information

To Whom

Reason

Authority

Designee of taxpayer

Taxpayer request

IRC § 6103(c)

State tax officials and law
enforcement agencies, state
audit agencies

Administration of state tax laws, tax refunds,
auditing state revenues, determining reward for assisting in recovery of federal taxes

IRC § 6103(d)

Taxpayer, taxpayer's spouse
or child, partners, certain
shareholders or officers,
guardian of incompetent,
administrator of estate,
bankruptcy trustee

Disclosure to persons with material interest,
who filed joint return, who need information to perform fiduciary duties

IRC § 6103(e)

Tax Committees of Congress

On request, but only when sitting in closed executive session

IRC § 6103(f)(1)

Other Committees

By House or Senate Resolution, but only when sitting in closed executive session

IRC § 6103(f)(3)

FBI, Executive Office of
the President, agency head

Where individual is under consideration for executive or judicial appointment

IRC § 6103(g)

Treasury employees

Where official duties require disclosure for
tax administration purposes

IRC § 6103(h)(1)

Justice employees

Grand jury proceedings, where taxpayer is
a party to the proceedings

IRC § 6103(h)(2)

Federal criminal investigators
with court order

Reasonable cause to believe a criminal act
has been committed and tax return may be
relevant; to locate fugitives from justice

IRC § 6103(i)

Federal agency head

Evidence of a violation of a federal non-tax
criminal law

IRC § 6103(i)(3)

Comptroller General, GAO
employees

Auditing IRS

IRC § 6103(i)(7)

General public

Inspection of accepted offers-in-compromise; unclaimed tax refunds

IRC § 6103(k)(1), (m)

Potential lien-holders

Disclosure of amount of outstanding
obligation secured by liens

IRC § 6103(k)(2)

Foreign government
"competent authority"

Exchange of information under tax treaties

IRC § 6103(k)(4)

Financial Management Service

To levy on government payments

IRC § 6103(k)(8)

Credit card companies

To accept payments to IRS by credit card

IRC § 6103(k)(9)

Various government agencies

To carry out acts relating to Social Security,
food stamps, housing assistance, student loans,
FERS, HCFA, Medicare, DC Retirement
Protection Act, blood donor locators

IRC § 6103(l)

National Archives

To evaluate records for destruction or
retention

IRC § 6103(l)(17)

Penalties for Disclosure

The Internal Revenue Code contains two main penalties for disclosure of tax returns and tax return information. Section 7213 makes willful disclosure which is not authorized by the Internal Revenue Code a felony punishable by a fine up to $5,000 or imprisonment of not more than 5 years, or both, plus the costs of prosecution. In addition to any other punishment imposed by law, federal employees must be discharged from employment upon conviction. Different paragraphs of the section apply to federal employees and contractors and to state and local employees. In addition recipients of information which was not authorized to be disclosed by the Internal Revenue Code can be subject to the same punishment for printing or publishing a return or return information in a manner not provided for by law. It is also a felony to offer to exchange any item of material value in exchange for a return or return information, and to receive in exchange for such solicitation any return or return information. The same $5,000/5-year potential penalties apply.

The second major penalty, contained in IRC § 7216, applies to tax return preparers. If any person who prepares a return for compensation knowingly or recklessly discloses any information furnished to him in connection with the preparation of a return, or knowingly or recklessly uses any such information for any purpose other than to prepare a return, then that person is guilty of a misdemeanor and can be fined up to $1,000 or imprisoned up to one year, or both, plus the costs of prosecution. There are exceptions for disclosures permitted under the Internal Revenue Code, ordered by a court, or made in order to prepare the person's state or local tax returns.

Penalties for Failing to Disclose

The principal penalty for failing to disclose one's TIN when requested is contained in IRC § 6723, which provides for a $50 penalty for each failure to comply with a "specified information reporting requirement." The maximum annual penalty is $100,000. There are also "penalties" in the sense that certain deductions cannot be taken unless a TIN is furnished or that additional withholding on certain distributions will be required. For example, IRC § 151(e) provides that no exemption shall be allowed unless the TIN of such individual is included on the return claiming the exemption. The loss of the exemption amount may exceed the $50 penalty amount. Under IRC §§ 3405 and 3406, backup withholding is required unless the taxpayer furnishes the proper TIN to the payer of income.

Footnotes

1.

P.L. 87-397, §1, enacted a new IRC § 6109.

2.

P.L. 94-455, §1211; IRC § 6109(d).

3.

Beginning in November 1999, tax return preparers can obtain a "preparer tax identification number" [PTIN] to use on returns which they are paid to prepare. This number is to protect the privacy of the preparer's TIN. The use of an alternative number was authorized by the IRS Restructuring and Reform Act of 1998, P.L. 105-206, § 3710.

4.

IR-1999-72 states that the IRS Restructuring and Reform Act of 1998 authorized the use of PTINs to respond to "concerns that a preparer's SSN could be used inappropriately by clientele and others having access to a prepared return."

5.

See footnote 3.