IRS DESCRIBES PROTOTYPE OF TIN MATCHING PROGRAM.

Rev. Proc. 94-24

SECTION 1. PURPOSE

This revenue procedure implements the prototype of an Internal Revenue Service on-line Taxpayer Identification Number (TIN) matching program under the backup withholding provisions of section 3406(a)(1)(A) and (B) of the Internal Revenue Code. Under the prototype, 200 randomly selected payors and one or more federal government payors will be allowed to match a payee's TIN electronically with records maintained by the Service before filing the relevant information return. The primary reasons for starting this program with a prototype are to (1) measure the projected costs and benefits of the program, and (2) identify and study any problems that might arise during its operation. The anticipated benefits are a reduction of (1) the number of notices sent to start backup withholding, and (2) the number of penalties for filing information returns and furnishing statements with respect to incorrect TINs.

SEC. 2. BACKGROUND

Under section 3406(a)(1) of the Code, backup withholding applies, in part, when a reportable payment is made to an account if (A) the payor has not received the TIN of the payee at the time of the payment, or (B) the TIN furnished by the payee to the payor has been determined to be incorrect and the payee has not furnished the correct TIN in a timely manner. See section 31.3406(d)-5 of the Employment Tax Regulations for the specific rules regarding incorrect TINs.

SEC. 3. DEFINITIONS

.01 The term "payee" means the person with respect to whom a reportable payment (as defined in section 3406(b)(1) of the Code) is likely to be made by a payor, as determined by the payor at the time the payee establishes a new account.

.02 The term "payor" means a person who files an information return that reflects a reportable payment made by that person.

.03 The term "account" means any account, instrument, or other relationship with a payor with respect to which a payor is likely to make a reportable payment. See section 35a.3406-3(e) of the temporary Employment Tax Regulations.

SEC. 4. SCOPE

This revenue procedure describes (1) the procedures for selecting, notifying, and accepting payors for the prototype, and (2) the operation and duration of the prototype authorized under section 35a.3406-3 of the temporary regulations. The prototype only applies to accounts opened on or after the date announced by the Service as the commencement of the prototype.

SEC. 5. THE PROTOTYPE

.01 SELECTION. To participate in the prototype, a payor must (1) have previously filed information returns reflecting reportable payments; and (2) be either one of the 200 payors randomly selected by the Service or a federal government payor selected by the Service. A payor that has not been selected by the Service may not participate in the prototype.

.02 NOTIFICATION. To notify each payor of its selection for participation in the prototype, the Service will send a letter no later than March 31, 1994, using the address that the payor has used on information returns reflecting reportable payments that it has filed with the Service. Once notified, a selected payor's participation in the prototype is completely voluntary.

.03 ACCEPTANCE. To be accepted for participation in the prototype, a payor that receives the notification described in section 5.02 above and desires to participate in the prototype must sign and return to the Service a memorandum of understanding and two security agreements that provide the rules under which the prototype will be administered. The Service will send the memorandum of understanding as an enclosure to the notification described in section 5.02. above. Upon acceptance, the two security agreements will be sent to each payor, each in separate mailings. The Service will inform a payor of its identification number, its password, and the telephone number of the prototype's data base.

.04 Memorandum of understanding and two security agreements.

(1) The memorandum of understanding will include the following terms and conditions:

(a) a limitation on the types of payments with respect to which the payor may access the data base;

(b) a requirement that the payor comply with certain confidentiality and privacy safeguards and execute agreements to that effect;

(c) a requirement that the memorandum of understanding and two security agreements be executed by duly authorized representatives of the payor;

(d) a requirement that the payor will provide necessary information to the Service for it to measure the effectiveness of the prototype; and

(e) any other requirements necessary to carry out this prototype.

(2) The two security agreements will include the following terms and conditions:

(a) restrictions prohibiting the sale, lease, assignment, loan, gift, or other transfer of the password and identification number to the data base of the prototype;

(b) requirements concerning the supervision and control of the individuals authorized to use the prototype's data base;

(c) requirements concerning the security of the payor's equipment used to access the prototype's data base and the storage of records received from it;

(d) requirements to comply with certain confidentiality and privacy safeguards; and

(e) any other security requirements necessary to carry out this prototype.

(3) The terms and conditions of the memorandum of understanding and the two security agreements will be nonnegotiable.

.05 OPERATION. A payor that participates in the prototype may only use it for accounts opened on or after February 1, 1994. To use the prototype, each participating payor must contact the prototype's data base using a dial-up modem and input a payee's name/TIN combination and a payor-assigned account number. The data base will electronically identify, by such account number, any name/TIN combination that does not match. The specific reason for the nonmatching will not be provided. The prototype will contain appropriate controls to prevent unauthorized use of its data base.

SEC. 6. DURATION AND EFFECTIVE DATE

The prototype will operate for a period of one to two years (as determined by the Service), beginning on the date announced by the Service as the commencement of the prototype.

DRAFTING INFORMATION

The principal author of this revenue procedure is Renay France of the Office of the Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Ms. France on (202) 622-4910 (not a toll-free call). For further information on the operation of the prototype, contact Ms. Frances Drummond on (304) 263-8700 (not a toll-free call).