What is a Tax ID Number (TIN)?

The Social Security Administration became a reality in 1936 under FDR’s New Deal. The first problem was how could it identify both people and businesses. It took them a bit, but they came up with the Taxpayer Identification Number (TIN). The TIN is most associated with what we know today as the Social Security Number (SSN), but it also covers Employer Identification Numbers (EINs), Individual Taxpayer Identification Numbers (ITINs), and other special identifiers used for specific types of entities. The Internal Revenue Service (IRS) uses these numbers to tie people and businesses to their tax obligations.

Then, around 1940, the SSN began its implementation as the tax id number for US taxpayers. But that didn’t help with businesses that also needed to pay taxes, so in 1954 the Employer Identification Number (EIN) was created that is a nine-digit number that businesses use.

The ITIN program fully rolled out in 1996 with the need to tax non-citizens income. The difference with ITIN when compared to SSN is that those required to use the ITIN aren’t eligible to receive social security benefits, such as nonresident aliens or dependents of US citizens.
Since the late 1990s, all individuals and businesses that have any tax obligations to the US must have a TIN of some kind.

The Goals of TIN

Back before the IRS had the TIN system of numbers, they struggled with matching returns to individuals. They might get a return from Jack Smith, but they wouldn’t know if it was Jack A. Smith or Jack C. Smith, and more often than not, mistakes will be made. So, by adding what we now call the SSN to individual returns, they could now validate returns to tax collection statements from payrolls.

This now meant that the IRS could automate its systems to detect incorrect numbers, prevent fraud, and allow third parties, such as employers, to send tax information directly to the IRS using the individual SSN for the person.
This now means that tax evasion is much more difficult because of the automated systems, TIN-matched data, and holds all taxpayers, whether individuals or businesses, accountable.

This is critical as the IRS now receives billions of returns each year, Forms W-2, 1099, 1098, and many other forms required to be sent. And because businesses are able to now check the TIN against government databases, that ensures that fake SSNs, mismatched TINs, or incorrect names are caught and it triggers an IRS alert.

TIN is often used in the Office of Foreign Asset Control (OFAC), FinCEN, and Homeland Security to help identify fraudulent transactions, prevent money laundering, and ensure the stability of our financial institutions. The TIN program is important to us all as it provides transparency where it’s needed the most, reporting and collection of taxes.

How TIN Benefits Your Business

No business wants the eye of the IRS on them, and correctly implementing TIN capture of your vendors can save you from that headache. Collecting your vendors TIN information is easy enough. Typically you’ll send them a Form W-9, then when you pay your vendors, contractors, and freelancers, you are required by law to report them on a Form 1099. Of course, the TIN needs to be on that Form.

Now, what are some of the potential headaches?

• If you report the wrong TIN or name combination, the IRS will likely send you a B-Notice, which is a formal warning that what you provided doesn’t match their records, and you might have to withhold 24% of future payments to that vendor until you’ve updated their information.

• If you don’t validate the vendor’s TIN, you run the risk of fraud. Fraudulent vendors use false or stolen identities to obtain payment. A valid and matched TIN can prevent scams, payments to shell companies, or unregistered entities.

• If you don’t have the correct TIN for your vendors, not only can you have the headaches of the B-Notices and then required backup withholdings, but the sloppiness of your records will show you as less-than-professional and makes the 1099 filing process more difficult, leaving you scrambling for contacts to correct your vendor TIN information.

How Source Technologies can Help 

If you are using Microsoft Dynamics BC or Acumatica as your ERP system, our Robotic Payments Automation (RPA) functionality integrates within the ERP system to provide you all of the protections above in one simple package.
RPA does TIN matching, which aids in OFAC validation as well as helping with your 1099 process so that you can ensure that you have the correct vendor information.

RPA will also do OFAC checks on each vendor as well as on each payment, and stores the status of each vendor, and, if found on the OFAC list, stores the date that it was found to be on the list.

RPA completes the vendor validation with Address validation, utilizing the USPS database to ensure proper addresses for your vendors.

RPA also allows you to outsource your payments, removing the risk and fraud opportunities by outsourcing the actual payments,  and has the additional benefit of significant rebates and a ROI in terms of months rather than years!

Talk to us about TIN, RPA, and fraud protection today!