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Once SSN's were required for all dependents the actual number of dependents claimed noticeably dropped validating the purpose of the 1986 tax law changes.

In the case of divorce or custody issues a parent - called the non-custodial parent - who does not live with the child can actually claim that child, but a copy of the court order indicating this status must be filed with the return as proof. At a minimum, the non-custodial parent should be prepared to provide a copy if the IRS requests it through a paper or in-person audit.

Other examples of SSN's or EIN's being required include payments to independent daycare providers. Congress and the IRS have long known that there are certain industries and work environments where payment is transacted on a cash basis which makes it difficult for the federal and state governments to trace and tax. In an attempt to control this Congress passed a series of credits such as the Child and Dependent Care Credit to encourage taxpayers to provide information on the people or businesses they were paying. The credit is a generous one but without the SSN or EIN of the payee it cannot be claimed on an individual's tax return.

Computers have made it much easier for government agencies to match records and track financial transactions. Since the federal and state governments largely require employers, financial institutions and other business entities - both profit and non-profit - to report information prior to individual returns being accepted, the records can be easily matched for accuracy. There are some reporting requirements that occur later in the tax season - typically between January 1st and April 15th - but for most individuals their information, such as a W-2 for wages and a 1099-INT for interest income, will be in the IRS computers by mid January if not sooner.

When an individual's tax return is submitted it is first matched against the Social Security Administration (SSA) records to ensure that the person filing the return and anyone else listed on that return actually exist and are not listed on another return that has already been filed. The IRS has three years from the required filing date - typically April 15th of each tax year - to make sure that the information an individual claims on their return such as wages and investment income is correct. If it doesn't match within certain tolerances allowing for rounding then the individual taxpayer will receive a notice from the IRS identifying the discrepancy. This could be in the form of a paper audit where everything is transacted by mail or an in-person audit where the taxpayer must make an appointment to see an IRS auditor face-to-face.

In the end, it is the individual taxpayer's responsibility to ensure that all information listed on their return is correct because that taxpayer is the first person the IRS is going to turn to for answers and verifications. So, check your personal and dependent SSN's and birth dates carefully and always diligently review your W-2 forms and financial reporting documents such as 1099-INT, 1099-DIV, 1099-B, etc., so that your records match the IRS computer files - you will be happy that you did.

For more information see the following IRS publications at www.irs.gov:

17 - Your Federal Income Tax (For Individuals)
929 - Tax Rules for Children and Dependents
550 - Investment Income and Expenses

Learn more about this author, Teresa Stone.
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