Final Regulations Permit Employers to Voluntarily Truncate SSNs on Employee Copies of Forms W-2

The IRS has issued final regulations that permit employers to voluntarily truncate employee Social Security Numbers (SSNs) on copies of Forms W-2 (Employee’s Wage and Tax Statement) that are furnished to employees [TD 9861].

Proposed regulations. On Sept. 20, 2017, the IRS issued proposed regulations that would allow employee SSNs to be truncated on the copy of the W-2 form furnished to the employee in order to help protect employees from identity theft (see Proposed Regulations Would Allow Truncated Taxpayer Identification Numbers on Employee Copy of W-2 Form, 9/27/17). A truncated taxpayer identification number (TTIN) displays only the last four digits of a taxpayer identifying number and uses asterisks or “Xs” for the first five digits.

Comments. Seventeen comments were submitted on the notice of proposed rulemaking and many recommended adopting the rules. Some disagreed and noted concerns of employees not being able to verify whether the SSN filed with the Social Security Administration (SSA) and IRS is correct and that it would be more difficult for tax return preparers to verify the employee has provided the correct SSN.

However, the IRS and Treasury Department determined that the benefit of allowing the truncation outweighs the risk that the unintended consequences would occur and could also be mitigated. For example, tax return preparers can use Forms W-2 containing truncated SSNs to verify employee information by using the last four digits of the SSN and the employee’s name and address.

Another objection noted an increased administrative burden on employers with employees who work in multiple states because the employer will have to determine the requirements for each state (some state and local governments may not allow truncation). This too was rejected by the IRS and Treasury Department, explaining that the rules accommodate potential burdens on employers by making truncation optional.

There was also a suggestion that a better way to protect employees’ identities is to require employers furnish the employee copy of Form W-2 electronically. However, this was outside the scope of the rule, and under existing rules, employers are permitted to furnish Form W-2 electronically if the employee consents.

Final regulations. To aid employers’ efforts to protect employees from identity theft, the final regulations amend existing regulations to permit employers to voluntarily truncate employees’ SSNs on copies of Forms W-2 that are furnished to employees so that the truncated SSNs appear in the form of IRS TTINs.

The final regulations also amend the regulations under Code Sec. 6109 (supplying of identifying numbers) to clarify the application of the truncation rules to Forms W-2 and to add an example illustrating the application of these rules. In addition, the final regulations delete obsolete provisions and update cross references in the regulations under Code Sec. 6051 (receipts for employees) and Code Sec. 6052 (returns regarding payment of wages in the form of group-term life insurance).

The final regulations take effect on the date of publication in the Federal Register, which is July 3, 2019.