The IRS has extended the pilot program that allows filers of information returns to truncate an individual payee's Social Security number or other nine-digit identifying number on paper payee statements if the filers meet certain requirements [Notice 2011-38, 2011-20 IRB].
The pilot program was in effect in the 2009 and 2010 calendar years. Notice 2011-38, 2011-20 IRB, extends the program through calendar years 2011 and 2012, as the IRS would like more time to evaluate the effectiveness of the program.
The pilot program only applies to paper payee statements in the Form 1098 series (mortgage interest), Form 1099 series (various payments, including, for example, miscellaneous income), and Form 5498 series (IRA and other items). Substitute and composite substitute statements (within the meaning of Reg. § 301.6722-1(a)(1)) that meet the requirements in the notice are also included in the pilot program. The pilot program is not available for any information return filed with the IRS, any payee statement furnished electronically, or any payee statement that is not in the Form 1098 series, Form 1099 series, or Form 5498 series. Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, is no longer included in the pilot program. Truncation of payee employer identification numbers (EINs) or filer identifying numbers is not permitted.
Requirements for truncation. A filer must satisfy the following requirements to be authorized to truncate identifying numbers for individuals on paper payee statements:
1. The identifying number must be a Social Security number, IRS individual taxpayer identification number, or IRS adoption taxpayer identification number;
2. It must be truncated by replacing the first five digits of the nine-digit number with asterisks or Xs (for example, the Social Security number 123-45-6789 could appear on the paper payee statement as XXX-XX-6789); and
3. It must appear on a paper payee statement (including substitute and composite substitute statements) in the Form 1098 series (other than Form 1098-C), Form 1099 series, or Form 5498 series.
The IRS will treat filers who meet the above requirements as having satisfied any requirement in Treasury and IRS guidance, whether in a regulation, form, or form instructions, to include a payee's identifying number on a payee statement.
The IRS notes that it has authorized truncation for the 2011 and 2012 calendar years, even though the 2011 Form 1099 instructions say that the program has expired.
The IRS hopes that the pilot program will reduce the risk of identity theft.