The IRS Identity Protection Personal Identification Number (IP PIN) is a six-digit number assigned to eligible taxpayers to help prevent the misuse of their Social Security number (SSN) on fraudulent federal income tax returns. An IP PIN allows the IRS to verify a taxpayer’s identity at the point of filing, preventing someone else from filing a tax return using the IP PIN holder’s SSN.

The IRS is working to expand this voluntary opt-in program nationwide. In January 2021, taxpayers can go to the “Get an IP PIN” tool on IRS.gov to get their six-digit pin.

How does it work?

Taxpayers with either a Social Security number or Individual Taxpayer Identification Number who can verify their identities are eligible. The IP PIN will be valid for one calendar year. Taxpayers must obtain a new IP PIN at the start of each filing season through the same account they initially created at irs.gov/ippin.

What does this mean for tax professionals?

Tax professionals should not file Form 14039, Identity Theft Affidavit, for clients who are not tax-related identity theft victims and who are voluntarily opting into the program. Tax preparers should enter the IP PIN issued to the primary and/or secondary taxpayers or their dependents when prompted by tax preparation products. An electronic return without a correct IP PIN will be rejected. Paper returns will be subject to greater scrutiny.

To get an IP PIN, must it be requested online?

Taxpayers who cannot authenticate their identities online and who made less than $72,000 may file Form 15227, which will be available next calendar year.

Taxpayers who cannot authenticate online and made more than $72,000 can verify their identities in person at an IRS office. An IP PIN will be issued within three weeks if their identity is authenticated at a local office.

Are there any changes for victims of tax-related identify theft?

No, there will be no change for victims of tax-related identity theft. Those clients whose e-filed returns are rejected due to a duplicate SSN filing should still file a Form 14039, mailed in with their paper tax return.

The IRS will investigate the case and remove the fraudulent return. Once the case is resolved, the taxpayer will automatically receive an IP PIN in the mail at the start of the next calendar year.

Question: Edgar runs a small technology company that uses the services of two foreign contractors. One lives in Guatemala and the other one lives in Costa Rica. They will be paid $5,500 and $8,500 respectively. Edgar needs to know if he has any obligation and compliance to issue them a Form 1099-NEC, Nonemployee Compensation?

Answer: No, Form 1099-NEC is not required to be issued to foreign contractors. First, the employer verifies the contractors are not U.S. citizens working outside the country. The foreign contractors will sign Form W-8BEN, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). By completing Part I and signing Form W-8BEN, the foreign contractors are certifying they are not U.S. persons. The foreign contractors do not need ITINs. Form 1099-NEC does not need to be filed [Reg.§1.6041-4(a)]. The Form W-8BEN is not filed with the IRS; however, the employer must keep it in the files in the event of an audit.

Question: Lylah, Bentley, Westin and Braxton inherited a home upon the death of their grandfather in 2016. The FMV of the property on the date of death was $100,000. Lylah bought out Bentley, Westin and Braxton for $20,000 each in 2016 by obtaining a bank loan. Lylah lived in the home as her principal residence until 2020 when the bank foreclosed on the property. She received a Form 1099-A with a debt outstanding of $45,000 and FMV of $80,000. She is personally liable for the outstanding debt. Can Lylah use the §121 exclusion to report the sale of the home, and what is her sales price?

Answer: Yes, Lylah can use the §121 exclusion since she owned and used the home as her principal residence for a period from 2016-2020. She meets the ownership and use test for two out of the five years before the sale.

Since Lylah is personally liable for the repayment of the debt, her deemed sales price when reporting the sale on the Form 8949, Schedule D is $45,000. Since this loan was recourse debt, the selling price of the home was the lessor of the FMV or the balance of the principal outstanding reported on the Form 1099-A. Her basis in the home is $85,000 ($25,000 + $60,000). Since her basis exceeds the sales price, she has a nondeductible loss on the foreclosure sale of her home.