New EIN Procedures: Responsible Party To Have an ITIN or SSN
On March 27, 2019 the IRS announced a revision to its EIN procedures which went into effect on May 13, 2019 (see announcement here). An EIN is an employer identification number, which is also known as a Federal Tax Identification Number, and is used to identify a business entity. Businesses need an EIN for a number of reasons, including to open bank accounts, obtain licenses, file income tax returns, etc.
Obtaining an EIN is a relatively simple process if the responsible party has a social security number
This begs the question, “who is a responsible party”? Prior to May 13, 2019, a responsible party was defined as:
“[T]he person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage or direct the entity and the disposition of its funds and assets. The ability to fund the entity or the entitlement to the property of the entity alone, however, without any corresponding authority to control, manage, or direct the entity (such as in the case of a minor child beneficiary), does not cause the individual to be a responsible party.”
In practical terms, prior to May 13, 2019, a responsible party of a limited liability company was any member (or owner) of the limited liability company – even if the owner was another company; and for corporations, the responsible party was generally an officer of the company, such as a President or Vice President.
Furthermore, prior to May 13, 2019, the IRS would accept applications for an EIN even if a responsible party did not have either an EIN, SSN, or ITIN, so long as the application was made by fax by submitting a Form SS-4 and Form 2848. However, effective as of May 13, 2019, the IRS revised its EIN application procedures as follows:
“All EIN applications (mail, fax, electronic) must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner or trustor. This individual or entity, which the IRS will call the “responsible party,” controls, manages, or directs the applicant entity and the disposition of its funds and assets [emphasis added]. Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity. If there is more than one responsible party, the entity may list whichever party the entity wants the IRS to recognize as the responsible party.” (see here for the exact IRS requirements).
The most significant change to the EIN application process stems from the new requirement that the responsible party have either an ITIN or SSN. This will have a significant impact on non-U.S. individuals or owners of limited liability companies who do not have an ITIN or SSN. If a non-U.S. owner of a limited liability company needs to obtain an EIN, they will first have to apply for an ITIN, which can be a complex and time consuming process and the IRS has limited the circumstances under which an individual is eligible to apply for an ITIN. Moreover, it is important to note that while the IRS has imposed the requirement that a responsible party have an SSN or ITIN prior to applying for an EIN, the IRS has not revised the rules to the ITIN application to include the need for an ITIN in order to apply for an EIN as a permissible basis for applying for the ITIN. Therefore, those advising the individual applicant for ITIN will need to carefully evaluate the rules for the Form W-7 (ITIN application – see instructions here) in order to determine the appropriate basis for applying for the number.
Furthermore, the IRS will no longer allow an entity (such as a corporation or limited liability company) to be a responsible party on the EIN application. This process formerly worked as a “back door” to obtain an EIN quickly online.
Speaking of back doors, most tax practitioners are aware that the IRS discontinued its practice of granting EINs over the phone a number of years ago. As a result of the discontinuing the practice of granting EINs over the phones, EINs could only be obtained online so long as the responsible party (as previously defined) had an SSN (not ITIN), or by submitting a fax application if the responsible party only had an ITIN or if the responsible party had neither an ITIN or SSN. Unbeknownst to some practitioners, EINs for foreign entities can still (even today) be obtained over the phone relatively quickly. The IRS is available to provide the EIN from 6:00 AM EST – 11:00 PM EST (this author has personally received an EIN at 11:00 PM from a parking lot at the EPCOT center) – the “back door.”
Practitioners should be prepared to account for the increased difficulty and time for obtaining EINs for non-U.S. people who do not have an ITIN or SSN.
Contact us, your business attorney in Florida, to help you obtain an EIN, ITIN or SSN in the United States.