People guard their social security numbers closely, and with good reason. If the wrong person gets a hold of that information, it’s all they would need to commit identity fraud and potentially cause the victim significant financial grief.

Therefore, it comes as no surprise that the IRS recently issued a ruling that creates a pilot program allowing filers of Form 1099 (1098 and 5498 too) to include a shortened version of the payee’s Taxpayer Identification Number when filing paper returns.

According to IRS Notice 2009-93, filers can choose to substitute their payee’s nine-digit identifying number (a social security number, TIN, or IRS Adoption TIN) with a truncated version including just the final four digits of the identifier. For example, if a contractor’s social security number is 123-45-6789, then filers are allowed to use XXX-XX-6789 on the form 1099.

In order to truncate your payee’s TIN, the following requirements must be met:

1. The identifying number being truncated must be a social security number, TIN, or ITIN.
2. The first four digits must be replaced with Xs or asterisks, leaving the final four digits visible.
3. The truncated identifier number only appears on paper returns sent to the payee.

While filers may include the truncated TIN when sending paper returns, any copies sent to the IRS must contain the full nine-digit number. In addition, filers are not permitted to use the shortened version when filing returns electronically.

The pilot program applies to all 1099s sent out for calendar years 2009 and 2010. It’s important to note that participation in the program is optional – payees cannot require filers to send their paper returns with truncated TINs.

Going forward, the IRS is examining ways to better implement TIN truncation. The IRS has invited public comment until May 10, 2010. Comments are specifically desired concerning the following topics:

• Should truncation be required, rather than optional?
• Should truncation apply to a wider range of tax documents beyond 1099s?
• Should truncation be allowed on electronic documents?
• Should filers be required to include the full TIN if they payee does not want the truncated version?
• Does TIN truncation create any unexpected difficulties for filers or payees?

You can submit your written comments on these issues to the IRS by mailing them to Internal Revenue Service, CC:PA:LPD:PR (Notice 2009-93), Room 5203, P.O. Box 7604, Ben Franklin Station, N.W., Washington, D.C. 20044. You can also email your comments to Notice.Comments@irscounsel.treas.gov. Your subject line must include “Notice 2009-93.”

This program is expected to be a much-needed protection against identify fraud.

“A person’s identifying number is sensitive personal information,” the IRS notice states. “A risk exists that this information could be misappropriated from a payee statement and misused in various ways, such as to facilitate identity theft.”