Tax and Employee Benefits Alert
Recently, various stakeholders and the IRS Information Reporting Program Advisory Committee have publicly urged the Internal Revenue Service ("IRS") and the Treasury Department to expand the IRS Taxpayer Identification Number ("TIN") Matching Program (the "Program"). These requests are largely an outgrowth of the impending information reporting requirements of the Affordable Care Act (the "ACA"), although various filers of other information returns have requested an expansion of the Program in the past. In response to the requests, the IRS has responded that it does not have the legal authority to expand the Program beyond its current scope, which is limited to payers of amounts potentially subject to backup withholding under section 3406 of the Internal Revenue Code (the "Code"). This white paper addresses the IRS's assertion and analyzes the current legal framework. Ultimately, the paper concludes that the IRS's position is not well grounded in the law and that existing statutory authority empowers the IRS to expand the Program.
If the IRS fails to expand the Program to permit filers to verify name and TIN information for individual insureds required to be reported under the ACA, a substantial number of erroneous penalty notices will inevitably be issued to individuals who maintain minimum essential coverage as required under the ACA. The inevitability of the issuance of erroneous penalty notices arises based upon the likelihood of human error in connection with the transmission and recordation of TINs (manually or electronically) to filers. The authors believe that the process of expanding the Program to include health insurers and others required to report coverage under section 6055 of the Code would take very little time or effort to implement. Aside from granting approval to registered filers, essentially no work would be involved for the IRS, and permitting filers to use the Program would reduce the burden of erroneous submissions on IRS, filers, and insureds.
The Current Program
The Program is a simple online process that allows registered filers of information returns to validate the accuracy of payee identifying information before submitting final information returns to the IRS.1 By quickly verifying payee information (or in this case insured information) before filing official information returns, filers dramatically reduce the number of errors related to incorrect TIN information. The ACA's individual mandate makes this prophylactic approach important because the IRS will issue penalty notices to individual insureds and seize refunds if it cannot verify the existence of qualifying coverage on properly filed information returns. Americans who are issued erroneous penalty notices and whose refunds are erroneously withheld are likely to be very upset, especially in cases when they maintained the required coverage. The Program can prevent almost all erroneous notices if it is only made available to filers that have repeatedly asked the IRS to expand the Program to no avail. To illustrate the effectiveness of the Program, several health insurers have expressed to the authors that they have experienced TIN matching error rate reductions of over 99 percent with respect to their current use of the Program for regular vendors.
Under the current scope of the Program, a filer of certain information returns may voluntarily register with the IRS to participate. Once registered, the filer may submit lists of payee names with corresponding TIN information to the IRS electronically -- either individually as information is collected from payees or in bulk data files. Larger filers that file hundreds of thousands or even millions of returns tend to submit the name and TIN data in bulk. The IRS response either validates that the submitted information matches a name/TIN combination in the IRS database or indicates that the information does not match. If there is no match, the IRS may provide additional information such as whether the submitted TIN has been issued. In the event of a mismatch, proactive filers have the opportunity to contact payees to reconfirm the name and TIN information, and most do so to prevent mismatches. Large filers frequently profess error rate reductions in excess of 98 percent through the use of this process. In other words, for every 100 erroneous name/TIN combinations in the filer's system, 98 or more are corrected through the use of the Program. These stellar results are no secret to anyone, including the IRS.
The Benefits of Opening the Program to ACA Filers
Effective for 2015, health insurance companies and sponsors of self-insured health plans must, for the first time ever, report the identity of the individuals to whom they provide health coverage to the federal government. Although some insurers may have collected TINs previously, many insurers did not possess TINs for most of their insured population, and the ACA expands the scope of reporting in an unprecedented manner. The new Forms 1095-B (Health Coverage) and 1095-C (Employer-Provided Health Insurance Offer and Coverage) are primarily intended to enforce the employer and individual shared responsibility provisions of the ACA. This expansion has put insurers in the new and unfamiliar role of collecting TINs from their customers.
It is important to understand how different this TIN collection requirement is from the TIN collection efforts of those that currently are entitled to participate in the Program. Under the Program, the only filers authorized to participate are those that make "reportable payments" (i.e. those payments subject to back-up withholding under section 3406 of the Code). Accordingly, the Program is open to those filers that make payments to payees from which a filer may be required to backup withhold. In sharp contrast, the ACA reporting requirements compel insurers to collect TINs from those from whom they receive payment. This reversal of the usual reporting obligation deprives ACA filers of the most powerful mechanism that other filers typically have in obtaining TINs -- the ability to withhold a substantial portion of the payment. Furthermore, ACA filers are not authorized to refuse to offer coverage to those who fail to provide accurate TINs.2 This makes the intentional provision of inaccurate TINs by covered individuals more likely than in other contexts. In addition to the erroneous penalties that may be imposed on individual insureds for failing to maintain minimum essential coverage, additional concerns exist regarding potentially large penalties likely to be proposed against filers (even if ultimately abated based on reasonable cause) for incorrectly reporting TINs for which the filer was not permitted to verify the accuracy of the name and TIN combination under the Program.
More problematic from a public policy perspective are the inevitable errors that will likely result from the large scale collection of TINs. No matter how careful telephone representatives, clerks, and others are in collecting TINs, a large number of errors will likely result. Based upon discussions with various health insurers, many insurers still do not have TINs for a significant portion of their insureds, and equally troubling, insurers are not confident that many of the TINs they do possess are valid. Because TIN collection often requires special handling under state law, many insurers opted to avoid the use of TINs until the ACA mandated the collection. Accordingly, the reporting requirements of the ACA will result in an unprecedented collection of tens of millions of TINs over a relatively short period of time. Given the large number of TINs required to be reported, even a very low error rate suggests the issuance of millions of penalty notices to Americans who actually possess minimum essential coverage. This is a problem that is not only foreseeable to the federal government, but one that is easily preventable by expanding the IRS TIN Matching Program.
As explained, the Program has dramatically reduced error rates for participating filers that use the Program in other contexts. There is no reason to believe that ACA filers would not show similar error reductions if permitted to use the Program. Moreover, most ACA filers have been very vocal in professing their desire to use the Program to proactively address potential name/TIN mismatches. Because so many individuals will have their TINs reported to the IRS as part of the ACA, the potential reduction in the number of Americans who would receive unnecessary and erroneous penalties for failure to maintain minimum essential coverage is dramatic. For example, assuming that only 150 million TINs are reported by ACA filers, a conservative 4 percent error rate would result in the reporting of 6 million errors. Permitting ACA filers to use the Program could reduce that number to approximately 60,000 errors based on the experience of current users of the Program.
The IRS's Legal Authority to Expand the Program
The IRS has stated publicly that the Program may not be made available to filers of information returns other than those reporting payments potentially subject to backup withholding under section 3406 of the Code.3 Although the IRS has never fully articulated why it believes it is legally precluded from expanding the Program, it appears to believe that section 6103, which imposes certain confidentiality requirements on taxpayer information, precludes the expansion of the Program. As explained herein, there is no substantive legal impediment to the expansion of the Program by the IRS based upon how the Program operates. Accordingly, the IRS could expand the Program immediately if it desired to do so.
Section 6103(b)(6) of the Code defines taxpayer identity to include "the name of a person with respect to whom a return is filed, his mailing address, his taxpayer identifying number (as described in section 6109), or a combination thereof." Although the Program makes use of the taxpayer's name and TIN, the Program does not disclose either data item but only discloses whether the TIN provided by the filer and the first four letters of the name provided by the filer match IRS records.4 In other words, the information provided under the Program is limited to whether the submitted data agrees with IRS records, which is provided by the filer itself. Further, filers must agree that they will only attempt to match name/TIN combinations for reporting designated by the IRS. The IRS cannot reasonably be considered to have disclosed either the taxpayer's name or TIN because it is information already known to the filer as demonstrated by the filer's submission to the IRS. Ultimately, if identification errors occur, the IRS reports the same name/TIN data back to filers through the penalty notice process.
Moreover, section 6103(b)(2) provides that the term "return information" " . . . does not include data in a form that cannot be associated with, or otherwise identify, directly or indirectly, a particular taxpayer." The only information disclosed by the Program -- whether there is a match with IRS records -- cannot identify any particular taxpayer. The IRS does not disclose any information concerning what its records reflect as the correct name associated with the provided TIN, nor does the IRS disclose any information concerning what TIN is associated in its records with the name provided. Indeed, the manner in which the Program operates does not even guarantee that the name and TIN provided by the filer actually match. For example, individuals with the same last name would all report as a match for a TIN that was accurate for any one of such individuals. Thus, it is inefficient and bespeaks a misunderstanding of the law to deny use of the Program to filers that agree to use the system properly when the IRS provides no new information back to the filer and when the IRS sends the very same name/TIN detail attached to a penalty notice to the filer if the submitted information returns are determined not to match.
Because the Program does not disclose any information protected under section 6103 of the Code, no statutory or regulatory authority for the Program is arguably necessary. Nevertheless, the broad grant of statutory authority under section 7805 of the Code is sufficient to support the current Program and its expansion. The primary authority cited by the IRS for the current Program is Treasury Regulation § 31.3406(j)-1.5 The preamble to the regulation explains that the regulation was issued under the authority of sections 3406(i) and 7805 of the Code.6 Section 3406(i) is a general grant of authority to the Treasury Department to adopt regulations regarding section 3406 (backup withholding) and makes no reference whatsoever to TIN matching:
The Secretary shall prescribe by such regulations as may be necessary or appropriate to carry out the purposes of this Section.
Not only does section 3406(i) make no mention of the Program, but neither does the conference report for the bill enacting section 3406 or any subsequent statutory amendment.7
Assuming for the sake of argument that the Program does disclose information protected by section 6103, the nonspecific language of section 3406(i) is not sufficiently specific to override it.8 Alternatively, if the IRS wants a legislative hook to support the expansion of the Program and avoid the requirements of section 6103, the broad grant of authority to administer and enforce the requirements of the Code under section 7805 provides more direct and compelling support than the general grant of authority to make rules to implement backup withholding under section 3406(i).
Section 7805(a) is generally thought of as providing authority for regulations interpreting provisions of the Code, but its language and application are broader. It contains a broad grant of authority to the Secretary of the Treasury to issue regulations that aid in enforcement, even if they are not interpreting particular statutory provisions:
Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the Secretary shall prescribe all needful rules and regulations for the enforcement of [Title 26] . . .
Thus, the only limitations on rules or regulations issued under section 7805(a) are that they be needful for the enforcement of the Code and that the authority to issue such regulations has not been expressly assigned to someone other than the Secretary of the Treasury. Because the Code does not grant authority to any other person to adopt TIN matching programs, the first limitation does not apply. Accordingly, the IRS may promulgate rules or regulations expanding the scope of the Program if it is a "needful rule [or] regulation[s] for the enforcement of [the Code]" under section 7805(a).
The authority to adopt "all needful rules and regulations" does not meaningfully constrain Treasury unless it promulgates regulations that are contrary to the Code. The U.S. Supreme Court has described the authority to adopt "all needful rules and regulations" as the "complete power" to regulate the subject in question.9 The Court further described the question of whether a rule is "needful" as resting within the discretion of the entity to whom the authority to issue rules has been given.10 The Court has similarly held that the term "necessary," a synonym of "needful," means "appropriate and helpful."11 The broad scope of section 7805(a) is apparent in the deference accorded to rules and regulations promulgated under it. For example, the Supreme Court and lower federal courts have long deferred to regulations issued under section 7805(a), provided that they "implement the congressional mandate in some reasonable manner."12 More recently, the Court has clarified that section 7805(a) is an "express congressional authorization to engage in the process of rulemaking" that requires Chevron deference to regulations promulgated under that section.13 No legal authority limits the power granted to the Secretary under section 7805(a) to promulgate regulations establishing compliance programs like the Program, which do not violate section 6103 and are adopted to improve the administrative efficiency, functionality, and enforcement of the U.S. tax system. Moreover, the legislative history behind section 7805(a) reveals no such limitation.
Ultimately, the IRS's position that section 6103 prohibits the expansion of the Program beyond its current scope is not legally sound. As described in this paper, no taxpayer information is disclosed under the Program. Moreover, section 7805 and the related case law establish that Treasury and the IRS have the existing authority to broaden the scope of the Program. Furthermore, if the general grant of authority in section 3406(i) is sufficient to authorize the current Program, then the very broad grant of authority under section 7805(a) is also sufficient to expand the Program to include filers of information returns required by the ACA and avoid the issuance of potentially millions of erroneous penalty notices.14 It is difficult to envision a more appropriate exercise of the Treasury's authority to effectively administer the tax laws than the expansion of the TIN Matching Program under these circumstances.
1. As described herein, the Program currently applies only in the context of parties that receive reportable payments that are subject to backup withholding under section 3406 of the Code, although the IRS could expand the Program for use with other information returns.
2. This is attributable to various state laws and the ACA's guaranteed issue provisions. See also Part 3.a.i of the Preamble to the Final Regulations on Information Reporting of Minimum Essential Coverage, 76 Fed. Reg. 13220 (Mar. 10, 2014) ("Nothing in these final regulations authorizes a reporting entity to terminate coverage if a TIN is not provided.").
3. See Part 6.e of the Preamble to the Final Regulations on Information Reporting of Minimum Essential Coverage, 76 Fed. Reg. 13226 (Mar. 10, 2014) ("Therefore, TIN matching is not permitted for purposes of section 6055 reporting and the final regulations [referencing the regulations under section 3406 of the Code] do not include section 6055 reporting in the TIN matching program.").
4. Historically, the Program has matched the TIN against the first four letters of an individual's last name. There are some reports that a more specific match is now being performed against the last name under the Program. Even if that is the case, the point still stands.
5. See Rev. Proc. 2003-9, 2003-1 CB 516 (Feb. 3, 2003).
6. See Preamble to Taxpayer Identification Number (TIN) Matching Program Final Regulations, 62 Fed. Reg. 33009 (June 18, 1997). The TIN Matching Program did not arise based upon a statutory directive. The IRS identified the general, nonspecific language under section 3406(i) and section 7805(a) as support for the promulgation of Treas. Reg. § 31.3406(j)-1, thus establishing the Program. Notwithstanding the approach taken by the IRS to establish the Program, the IRS could also have established the Program through less formal guidance than regulations based upon the authority granted to the Secretary of the Treasury under section 7805(a).
7. See H.R. Rep. No. 98-325, at 38–41 (July 27, 1983). A different provision in an earlier version of the bill contemplated a mandatory TIN matching system, but it was dropped from the final bill and does not reflect how the current Program operates.
8. Publication 2108A states that section 3406 permits the disclosure of taxpayer name/TIN combinations to certain third-party payers. However, the disclosure explicitly permitted under section 3406 relates only to the disclosure of a mismatch on a return filed that subjects the taxpayer to backup withholding by the filer, i.e., at the time backup withholding applies. It does not contemplate pre-filing disclosures by the IRS intended to improve compliance. Consequently, the IRS has relied only on section 3406(i) of the Code as authorization for the Program and not any other provision under section 3406.
9. Kleppe v. New Mexico, 426 U.S. 529, 540-41 (1976).
10. Id. at 539.
11. INDOPCO v. Commissioner, 503 U.S. 79, 85 (1992) (the term "necessary" imposes "only the minimal requirement that the expense be 'appropriate and helpful' for the development of the taxpayer's business") quoting Commissioner v. Tellier, 383 U.S. 687, 689 (1966); see also Welch v. Helvering, 290 U.S. 111 (1933).
12. United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 219 (2001) citing United State v. Correll, 389 U.S. 299, 306-307 (1967). In Cleveland Indians Baseball, the Court explained the breadth of the enforcement and administrative powers of the IRS when it wrote, "'[W]e do not sit as a committee of revision to perfect the administration of the tax laws.' United States v. Correll, 389 U.S. 299, 306–307 (1967). Instead, we defer to the Commissioner's regulations as long as they 'implement the congressional mandate in some reasonable manner.' Id. at 307. 'We do this because Congress has delegated to the [Commissioner], not to the courts, the task of prescribing all needful rules and regulations for the enforcement of the Internal Revenue Code.' Nat'l Muffler Dealers Ass'n, Inc. v. United States, 440 U.S. 4 72, 477 (1979) (citing Correll, 389 U.S. at 307 (citing 26 U.S.C. § 7805(a)) ). This delegation 'helps guarantee that the rules will be written by 'masters of the subject' . . . who will be responsible for putting the rules into effect.' 440 U.S., at 477 (quoting United States v. Moore, 95 U.S. 760, 763 (1878))."
13. See Mayo Fdn. For Med. Educ. & Res. v. United States, 562 U.S. ___, 131 S. Ct. 704, 713-14 (2011).
14. Expanding the Program requires no greater level of creative conjuring than the IRS performed when it developed the existing Program, especially given the language of section 7805 that does the real heavy lifting.
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