What is a Tax Identification Number (TIN) and Types of TINs?
In 2021, social security numbers identify individuals, their legal status, nationality, and more. Even businesses are required to register themselves with the Social Security Administration to get approved for a taxpayer identification number.
Today, TINs are used to identify self-employed individuals, businesses, their tax compliance status, operational status, regulatory compliance status, and other information. TINs are even used to track prior tax records, suspicious activity, and violations. None of this would have been possible if it wasn’t for social security.
So, today, we will take a look back at how the social security program was introduced, its initial purpose, its uses, and its influence in establishing and maintaining regulatory compliance.
And through this approach, we will understand the introduction of the taxpayer identification number and its variants, SSN, EIN, ITIN, ATIN, and PTIN, and their uses.
Origin Of Social Security Program
The Social Security Act was introduced by the 75th United States Congress on August 14, 1935, in order to record, track, and identify the retirement benefits offered to the elderly and the insurance benefits offered to unemployed individuals in the U.S.
But as the economy grew, identity theft took centre stage. Many businesses and individuals alike reported heightened identity theft and financial crime cases.
So, in addition to using the social security information to aid retirement benefits to U.S. citizens, it was also used to help businesses and individuals to follow regulatory compliance.
Understanding Taxpayer Identification Number
A taxpayer identification number is a unique 9-digit number assigned to each business for identification purposes. It is also assigned to self-employed individuals. The TIN once registered with the social security administration has to be reported to the IRS through informational returns.
Every transaction that takes place in a business that is associated with the taxpayer identification number (TIN) must be reported to the IRS with utmost transparency. This helps the IRS track the incomes and payments associated with your business and the recipient’s business.
To help you keep a track of the informational reporting associated with your unique TIN, the IRS requires you to save a copy of every return you file. This documentation helps you plead your case in a court of law should your business encounter noncompliance discrepancies.
Learn more about business identification numbers from the IRS here
Understanding Different Types of TINs
- Social Security Number (SSN)
- Employer Identification Number (EIN)
- Individual Taxpayer Identification Number (ITIN)
- Adoption Taxpayer Identification Number (ATIN)
- Preparer Tax Identification Number (PTIN)
- Using TINs For Tax Compliance & Regulatory Reporting
Primarily, social security numbers are used to identify the citizens of the U.S. and their tax compliance status. The IRS uses the social security number to track an individual’s income, retirement benefits, unemployment benefits, tax history, sources of income, security assessments, and regulatory standing. This information is also used to assess penalties and necessary measures on individuals if their records show non-compliant practices.
Individuals use their social security numbers to report their personal incomes, payments, and other information to the IRS. It is also commonly used for most legal documentation and processes.
-> Apply for SSN using Form SS-5
An employer identification number is commonly known as a Federal Employer Identification Number or Federal Tax Identification Number. It is assigned by the IRS to identify business entities with employees who receive certain employment compensations and benefits. It is also issued to trusts and estates that generate reportable incomes.
The employer identification number is used to track the tax history of the business, sources of their incomes, vendor associations, employee compensations, regulatory compliance, and ensuring that the business is working in accordance with legal status provided to it by the state and federal laws.
EIN must be specified in every informational return submitted by the business to trace the geographical operations of a business, the nature of the transactions, and the compliance status.
Most of the 1099 reporting, HVUT reporting, and other tax regimes require businesses to furnish their EINs after proper TIN validation.
An individual taxpayer identification number is assigned to certain non-residents, resident aliens, their spouses, and dependents. This tax processing number is typically assigned to individuals who cannot get a social security number in the U.S.
A non-resident or their dependent cannot claim the earned income credit with an ITIN. Instead, they have to apply for a social security number to do so.
Individuals who want to obtain an ITIN must send a request for ITIN through Form W-7 and submit it to the IRS or its authorized agents.
Individuals who want to apply for an SSN have to submit Form SS-5 with the required documentation.
ITIN is usually assigned to individuals to help them comply with the U.S. tax laws and track their incomes, sources of income, and the nature of their transactions.
Adoption taxpayer identification number is a temporary identification number issued by the IRS to individuals who want to legally adopt a resident child or a U.S. citizen. This 9-digit number is issued to individuals who were not able to obtain an SSN for the child in domestic adoption.
ATIN must be used across all tax documentation, legal adoption paperwork, and other required documentation to help the federal organizations track the incomes of the taxpayers, their tax history, financial activity, and other regulatory compliance regimes.
This information is further used by the authorities to safeguard the adopted child from human trafficking and other illegal activities.
-> Apply for ATIN using Form W-7A
Prior to January 1, 2011, furnishing a valid PTIN on returns was optional for tax preparers. However, due to non-compliant practices followed by tax preparers and businesses to hide the compensations paid for tax benefits, the IRS mandated that every tax preparer who has helped prepare a state or federal tax return in part or full, and received certain compensation for preparing these returns, must provide a valid PTIN. The PTIN must be entered in the Paid Preparer section of a tax return.
-> Apply for a PTIN using Form W-12
A taxpayer identification number is issued by the IRS or social security administration or their authorized agents to individuals and businesses. The assigned numbers are used to identify the individual, their tax history, compliance regimes, nature of their transactions, sources of their incomes, and other regulatory information.
The Social Security Administration and the IRS work independently with a common intent to ensure tax and regulatory compliance. In order to curb corrupt and illegal activities, such as terrorism financing, money laundering, prohibited trading, identity theft, and more, social security programs are accelerated, helping and protecting common individuals and citizens from unprecedented threats.
Apart from ensuring tax compliance, social security information is also used to trace radicalized terrorism-funding campaigns that are now working in an organized ecosystem.
With cross-border operations, identity fraud, money laundering, and high-risk profile instances being on the rise, social security is the most important regime followed by all legal businesses and organizations compulsively.
Taxpayer identification numbers are not only used to identify individuals. They’re also used to validate the information or documentation provided to verify if an individual’s identity is factual.
This is why businesses in finance, banking, insurance, e-commerce, government, retail, and other sectors are integrating a structured KYC process before onboarding the individuals.
Comprehensive customer identification processes, customer due diligence, and profile scrutiny are some of the few known practices followed by organizations to identify the main conspirators behind money laundering, terrorism, and related regimes.
