For other versions of this document, see http://wikileaks.org/wiki/CRS-RL30323 ------------------------------------------------------------------------------ Order Code RL30323 CRS Report for Congress Received through the CRS Web Confidentiality of the Taxpayer Identification Number under the Internal Revenue Code September 28, 1999 Marie B. Morris Legislative Attorney American Law Division Congressional Research Service ~ The Library of Congress ABSTRACT 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. This report illustrates 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. There are no current plans to update the report. Confidentiality of the Taxpayer Identification Number under the Internal Revenue Code 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. Contents Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 TINS on Taxpayer's Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 TINs to Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Permissible Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Penalties for Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Penalties for Failing to Disclose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 List of Tables Table 1. Requirements to Furnish TINs on Taxpayer's Return . . . . . . . . . . . . . 1 Table 2. Requirement to Furnish Taxpayer's TIN to Another Party . . . . . . . . . . 3 Table 3. Examples of Persons to Whom IRS Can Disclose Taxpayer Return Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 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 1 P.L. 87-397, §1, enacted a new IRC § 6109. 2 P.L. 94-455, §1211; IRC § 6109(d). CRS-2 Whose TIN Why Required 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 IRC § 1(g) Minor child with unearned income is taxed at child under age 14) 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. 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." CRS-3 Table 2. Requirement to Furnish Taxpayer's TIN to Another Party Who To Whom When Why Required Provides Parent Child under If child's IRC § 1(g) Minor child with unearned age 14 with income not income is taxed at rates determined by unearned reported on parents' income income parent's return, in time to file return Alimony Former In time for IRC § 215(g) To verify alimony income recipient spouse taxpayer to file compared to alimony deduction return Child care Customers of In time for IRC § 21 Child care tax credit providers child care customers to IRC § 129 Child care assistance program providers file return provider Medical Trustee of When account IRC § 220(j)(4) Reporting by MSA Savings medical opened trustees Account savings holder account Seller of real Buyer of real At time of sale IRC § 1445(b) If seller's TIN not property property of residence furnished, buyer must withhold 10% of worth more amount realized than $300,000 or sale of nonresidential property Seller of real Buyer of real Buyer IRC § 6109(h) Requires taxpayers property property if deducting claiming a deduction under IRC § 163 for seller interest qualified residence interest where seller provides includes provided financing to include seller's TIN financing seller's TIN on on return 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 CRS-4 Who To Whom When Why Required Provides Recipients of Payers At time of IRC § 3401(o) Recipients of sick pay, certain wage request for certain annuities, or supplemental equivalents withholding of unemployment compensation can request income taxes withholding from third-party payer of benefit Gamblers Payers of On winning IRC § 3402(q) Payers of certain winnings gambling winnings are required to deduct and withhold Pension Payers Before payment IRC § 3405 Requires withholding unless recipients recipient elects out; no election out permitted unless recipient furnishes payer with TIN Interest Payers, e.g. On opening IRC § 3406 Back-up withholding recipients banks account required if TIN not furnished; IRC § 6049 Dividend Payers of On opening IRC § 3406 Back-up withholding if TIN recipients dividends account, stock not furnished; IRC § 6042(a), 6044 purchase Other Payers of Various IRC § 3406 Back-up withholding if TIN income income not furnished: recipients 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 IRS Application IRC § 6039E for U.S. passport Applicants IRS Application IRC § 6039E for permanent resident status CRS-5 Who To Whom When Why Required Provides Persons IRS Time of IRC § 6039G abandoning renunciation U.S. citizenship Purchasers Recipients of At time of IRC § 6050I Requires reporting receipt of using cash more than payment payments aggregating more than $10,000 payments $10,000 in cash to IRS greater than in cash, $10,000 including from persons posting bail Donors of Donee Prior to sale of IRC § 6050L requires donees who sell more than property by donations within two years of receipt to $5000 of donee report donor's TIN to IRS property Contractors Head of Entry into IRC § 6050M requires reporting of TIN with federal federal contract of every person with whom the agency government executive enters a contract during the year agency Mortgagors Mortgage Entry into IRC § 6050H requires mortgagees holder contract receiving $600 or more of interest to file annual return with IRS and mortgagor Debtors Financial When debt of IRC § 6050P requires reporting entities and $600 or more is cancellation of indebtedness of more than government canceled $600 agencies Students and Educational On enrollment IRC § 6050S requires reporting of higher parents institution, education tuition and related expenses student loan providers, tuition plans Taxpayer Tax return In order to IRC § 6107 requires return preparers to who pays preparer prepare return keep a list of name and TIN of taxpayers return whose returns they prepare preparer Tax return Taxpayer On return IRC § 6107, 6109(a)(4)5 preparer Partner Partners For returns IRC §§ 6229(e); 6230(e) 5 See fn. 3 above. CRS-6 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 Administration of state tax laws, tax IRC § 6103(d) enforcement agencies, refunds, auditing state revenues, state audit agencies determining reward for assisting in recovery of federal taxes Taxpayer, taxpayer's Disclosure to persons with material IRC § 6103(e) spouse or child, partners, interest, who filed joint return, who need certain shareholders or information to perform fiduciary duties officers, guardian of incompetent, administrator of estate, bankruptcy trustee Tax Committees of On request, but only when sitting in IRC § Congress closed executive session 6103(f)(1) Other Committees By House or Senate Resolution, but only IRC § when sitting in closed executive session 6103(f)(3) FBI, Executive Office of Where individual is under consideration IRC § 6103(g) the President, agency head for executive or judicial appointment Treasury employees Where official duties require disclosure IRC § for tax administration purposes 6103(h)(1) Justice employees Grand jury proceedings, where taxpayer IRC § is a party to the proceedings 6103(h)(2) Federal criminal Reasonable cause to believe a criminal IRC § 6103(i) investigators with court act has been committed and tax return order may be relevant; to locate fugitives from justice CRS-7 To Whom Reason Authority Federal agency head Evidence of a violation of a federal non- IRC § 6103(i)(3) tax criminal law Comptroller General, Auditing IRS IRC § 6103(i)(7) GAO employees General public Inspection of accepted offers-in- IRC § compromise; unclaimed tax refunds 6103(k)(1), (m) Potential lien-holders Disclosure of amount of outstanding IRC § obligation secured by liens 6103(k)(2) Foreign government Exchange of information under tax IRC § "competent authority" treaties 6103(k)(4) Financial Management To levy on government payments IRC § Service 6103(k)(8) Credit card companies To accept payments to IRS by credit IRC § card 6103(k)(9) Various government To carry out acts relating to Social IRC § 6103(l) agencies Security, food stamps, housing assistance, student loans, FERS, HCFA, Medicare, DC Retirement Protection Act, blood donor locators National Archives To evaluate records for destruction or IRC § retention 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 CRS-8 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. ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RL30323