The New IRS TIN Matching Program - Ken Golliher

IRS TIN-Matching (TM) Program Available Soon, But Financial Institutions Will Want More

by Ken Golliher Opinions expressed are those of the author.

"I'm from the government and I'm here to help you" is one of the most derisive taunts in the American vernacular. Yet, this time the government, in the form of the Internal Revenue Service (IRS), is developing a service that really will help financial institutions.

The IRS is putting the final touches on a "TIN-Matching" (TM) program that could be of enormous value to financial institutions in filing information returns. Ultimately, it may also be helpful in improving the accuracy of Currency Transaction Reports (CTRs) and implementing customer identification programs (CIPs).

Background
There are four types of U.S. taxpayer identification numbers (TINs):

Social Security numbers (SSN's) issued by the Social Security Administration (SSA);
Employer Identification Numbers (EINs) issued by the IRS;
Individual Taxpayer Identification Numbers (ITINs) issued by the IRS; and
Adoption Taxpayer Identification numbers issued by the IRS.

When a financial institution files information returns on magnetic media, it assigns a code to the TIN which tells the IRS which data base to search for the corresponding "name control." Generally, the name control is usually the first four characters of either an individual's surname or the proper name of an entity. For a "match" to take place, the financial institution must have both the TIN and the name that goes with it.

Since the late 1980's, the IRS has emphasized its "Information Returns Program" which pressures financial institutions to file complete and accurate customer information returns. If a financial institution files an information return using an incorrect name/TIN combination, it receives a $50 penalty assessment. Penalty assessments can run into thousands of dollars. Yet, financial institutions are wholly dependent on their customers for providing the correct TIN and the corresponding name.

A parallel situation where the name/TIN combination is mission critical involves the reporting of currency transactions exceeding $10,000 to the Financial Crimes Enforcement Network (FinCEN). FinCEN only began using the matching process a few years ago. Today, if a financial institution files a Currency Transaction Report (CTR) using an incorrect name/TIN combination it receives written notification of the error and a request for corrected information from FinCEN.

If the customer has provided an incorrect number for an information return, the financial institution can put forth a "due diligence" defense which shows it took a number of steps to obtain the correct TIN. If the financial institution can prove due diligence, the penalty is waived. However, the process is cumbersome and the financial institution may still end up being responsible for imposing backup withholding on the customer in perpetuity.

In the CTR example, the financial institution may be reporting on the name and SSN of a person conducting the transaction for a customer - the conductor may not actually be a customer and the financial institution often has no way to obtain corrected information after being notified of a mismatch by FinCEN. Bank examiners oftentimes mistakenly criticize the financial institution for committing an "error" when it files a CTR on an incorrect name/TIN combination, even though the financial institution used the number provided by the person who conducted the transaction.

On both a CTR and an information return, the government provides feedback that the name/TIN combination is incorrect. However, there is a third area where financial institutions are responsible for obtaining the correct combination and feedback is not readily available.

Effective October 1, 2003, financial institutions are responsible for implementing "Customer Identification Programs (CIPs)" under which they must obtain the customer's: name, address, date of birth and identifying number prior to opening a new account. The financial institution's CIP must verify that information, including any TIN received as an identifying number, in order to establish the identity of the customer.

Currently, there are a number of commercial vendors whose services can verify TINs as a part of the account opening process. However, that "verification" is limited. Using publicly available information, vendors can establish when and where a number was issued; whether an SSN's holder has been reported as deceased; whether the customer has used that TIN in other business relationships; and some other things. What vendors simply cannot do is to establish that the name/TIN combination actually matches with IRS or SSA data bases.

What the TM program does is enable financial institutions to verify that the name/TIN combination is accurate before they provide certain information returns to the IRS. Theoretically, it could allow them to verify name/TIN combinations for all the fact situations above. However, the TM was not designed to fulfill those needs.

Who Can Participate and What Name/TIN Combinations Can Be Submitted?
The supporting legal structure is synthesized in IRS Rev Procedure 2003-9 published earlier this year. (The Rev. Proc. mentions IRS Publication 2108, but the author has been unable to locate a copy on the IRS web site.) Other resources are an apparently unofficial "Frequently Asked Questions" worksheet as well a Power Point slide presentation, both developed by IRS personnel.

In essence, TM users must be "payors" filing information returns for income that is subject to backup withholding. For example, a Form 1099 INT used to report interest paid on bank deposits qualifies. However, a Form 1098, used to report interest received on real estate mortgages, does not. Unless a payor files information returns involving backup withholding, it cannot use the TM program. Nevertheless, banks, thrifts and credit unions will obviously qualify to use the service.

However, the TM program's scope is further narrowed by the fact that: "Participants in the Program must?transmit only name/TIN combinations relating to accounts?with respect to which a reportable payment is made, or is likely to be made, on or after the effective date of this revenue procedure?" That language clearly indicates that a bank could submit the name/TIN combination of an individual opening an interest bearing account or purchasing stock in the bank. Both fact situations are likely to involve reportable payments of interest or dividends.

However, that same bank could not submit the name/TIN combination of an individual who was only conducting a reportable cash transaction, opening a safe deposit box, borrowing money or even opening a non interest bearing deposit. That restriction eliminates a huge percentage of the fact situations where banks, thrifts and credit unions would like to be able to verify a name/TIN combination.

How Will TM Work?
Government agencies have been allowed to verify TINs through the IRS for several years, but that mechanism was dependent on magnetic media or telephone calls. The TM program will be online using a web address established by the IRS.

Payors will "register" by filling out an online application. They will then be assigned a confirmation code which is sent to them by U.S. mail. The assignment of roles for responsible officials, authorized agents and delegated users within the financial institution is to be completed during the application process.

There will be two methods for submitting name/TIN combinations for verification. An "interactive" request can include up to 25 name/TIN combinations and can be submitted "live" online. It is expected that a response to an interactive request would be available in 5 seconds. A "bulk" request can include up to 100,000 name/TIN combinations and generate a response within 24 hours.

The Rev. Proc. linked above indicates the payor is to "transmit only name/TIN combinations that have not been previously transmitted by that participant to the Service for matching." Clearly, the IRS does not expect financial institutions to submit their full files every year, only those combinations have not been submitted in prior years. (That suggests that payors should have a method for tracking whether a name/TIN combination has been submitted previously.) In any case, it might become a standard practice for an institution to make a daily or weekly submission of name/TIN combinations for customers opening new accounts.

The information submitted for each query would be:

TIN type;
TIN;
name; and
account number (optional).

It is important to note that the payor must supply both the name and the TIN that goes with it. If the financial institution supplies only the name or only the TIN, the TM program cannot supply the missing information. The TM program cannot be used for a "fishing expedition" where the payor tries multiple spellings of a single name or several similar numbers in connection with the same name. Submission of the account number is voluntary, but it is for the convenience of the financial institution.

The response received for each query would include the information submitted followed by a code:

0 - Name/TIN combination matches IRS records
1 - Missing TIN or TIN not 9 digit numeric
2 - TIN not currently issued
3 - Name/TIN combination does not match IRS records
4 - Invalid request (i.e., contains alphas, special characters)
5 - Duplicate request

Please note code 5. Apparently the IRS computer will know if this payor has submitted this name/TIN combination before.

Clearly, the TM program's use would help eliminate errors in information reporting. In addition, its use would automatically constitute a "due diligence" defense for any name/TIN combination which the payor had previously verified through TM that was later the subject of a penalty assessment.

The Rev. Proc. linked above notes that a negative response to a query would not trigger backup withholding. It also notes that the financial institution is prohibited from refusing to open an account due to a negative response.

While the financial institution might not be able to refuse to open an account when a name/TIN combination fails, this author suggests that a financial institution might still require formal verification of the name/TIN combination. By comparison, in the second B-Notice (IRS notification of an incorrect name/TIN combination) the IRS requires the financial institution to receive an IRS or SSA form authenticating the name/TIN combination before it can discontinue backup withholding. Here, the financial institution could institute an identical demand of its own as a condition of keeping the account open; unless the customer provides IRS or SSA authentication, the account will be closed.

When Will TM Be Available?
There are indications in the linked documents that TM was expected to be "live" by now. Apparently, the interactive queries were to be available by the summer of 2003 and the bulk queries were to be available later this fall. Obviously, the program is behind schedule. An IRS analyst indicates, "We are currently awaiting an announcement from our e-services and communications office regarding the program availability dates, which will be posted on the IRS web page."

Summary
Any TIN-matching program issued several years ago when the IRS first publicly contemplated the idea would have been greeted warmly. However, TM's unwavering devotion to information reporting that enhances federal revenues is unlikely to fulfill bankers' current fantasies. Today, financial institutions have several responsibilities dependent on the accuracy of the name/TIN combination and they would undoubtedly appreciate broader use of a tool that would help them fulfill compliance responsibilities.

Nevertheless, "Half a loaf is better than none." While campaigning for an expansion of the service only seems prudent, making use of it to the extent the law allows is just common sense.

First published on BankersOnline.com 09/16/03