The IRS Is Allowing TIN Masking on Form W-2. Here’s Why It’s a Good Idea

Wendy Walker
July 9, 2019

At last, the IRS is allowing payers to truncate, or effectively mask, tax identification numbers (TINs) on Forms W-2 sent to payees. The decision comes after years of concern from companies and taxpayers about the risk of exposing TINs, or Social Security Numbers in the case of individual payees, in W-2 distributions. 

The new policy will not be in place until TY2020, so payers have another year to wait before it takes effect. While payers will still be required to mail Forms W-2 information, the ability to remove full numbers from paper statements sent to payees represents a breakthrough for data privacy. 

W-2 TIN masking as a source of controversy due to data privacy concerns

TIN masking or truncating on Form W-2 has been a source of controversy in the last several years in particular. In 2017, the rest of the government adopted the Social Security Fraud Protection Act of 2017, which forbade government agencies from displaying TINs on correspondence. However, tax law still required payers to send the information to recipients with TINs exposed.

Some states have responded by outlawing the mailing of sensitive information; 17 states currently have laws forbidding payers to mail documents that reveal TINs. However, since federal law in the form of IRS regulations supersedes state law, those state statutes do not affect Forms W-2 from being sent to payees with private information exposed for tax purposes. 

History of TIN masking on Form W-2

Now, however, the IRS will allow payers to voluntarily conceal TINs on Forms W-2 sent to payees, drawing a comparison to the agency’s 2014 decision to allow TIN masking on Forms 1099, which itself was five years in the making. 

The PATH Act, passed in December 2015, opened the door for truncated TINs on Forms W-2. Prior to the PATH Act, a statute required SSNs to appear on W2s, so in order to allow for masking, Congress had to change the law. Lawmakers did just that in the PATH Act by changing the language to an “identifying number,” thereby allowing for masking.  

Right away, payers wanted to start masking in 2016, but the change in the law was really the first step. The IRS still needed to act. It issued proposed regulations in 2017 that didn’t pass until this year.

Reasons to mask TINs on Forms W-2

Just as it is with Form 1099, TIN masking on Form W-2 is a good idea. 

Theft of W-2 forms is a big problem. The highest rates of mail theft, which affects an estimated 400,000 victims per year, occurs during tax season, according to Forms W-2 sent via mail are required to be enclosed in an envelope that is clearly marked with the words “Important Tax Information Enclosed,” which provides a signal to thieves that private information is inside. Thieves can use Forms W-2 to open credit-card, bank and other accounts, to file for a tax refund with IRS or even to apply for a job. 

For payers, theft of forms can create huge problems. When tax information is inadvertently breached, the payer is often liable for providing remedies to the payee, or individual taxpayer, for credit monitoring and other services. Plus, regulatory laws require reporting of breaches of private information, a costly and arduous process for companies that brings with it the risk of loss of reputation.

Best practices for Form W-2 TIN masking

A few basic best practices apply for companies masking TINs on Forms W-2. First, payers should not, and legally cannot, mask copies filed with the Social Security Administration. This is one of the most common filing mistakes cited by the IRS related to TIN masking on Forms 1099. Also, payers should not come up with alternate ways to mask TINs. They should follow the specific format prescribed by the IRS in its final regulations: xxx-xx-1234

Payers need to implement controls to ensure TINs are masked. For example, audit reporting during tax reporting season can pinpoint any W-2 records that appear in a print file without masked TINs, allowing for correction before the mailing occurs. Companies should also offer electronic delivery of Forms W-2 and 1099. Electronic delivery is the best way to eliminate mail fraud during tax season … and saves some trees along the way!

Now that TIN masking is finally legal for Forms W-2 sent to payees, payers need to mask TINs and make sure they do it properly in order to avoid information security risks and other negative consequences. 

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Wendy Walker

Wendy Walker is the principal of Tax Information Reporting solutions at Sovos. She has more than 15 years of tax operations management and tax compliance experience with emphasis in large financial institutions, having held positions with CTI Technologies (a division of IHS Markit), Zions Bancorporation and JP Morgan Chase. Wendy has served as a member of several prominent industry advisory boards. She graduated with a BS in Process Engineering from Franklin University and earned her MBA from Ohio Dominican University, in Columbus, Ohio.
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