Update in EIN Procedures: Who is a Responsible Party?

O
n March 27, 2019 the IRS announced a revision to its EIN application process.

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:

“The 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 layman’s 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:

1-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; and

2-Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity.

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.

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.

In conclusion, it will be much more difficult for non-U.S. people who do not have an ITIN or SSN to obtain an EIN after May 13, 2019. For additional information on your options for obtaining an EIN in light of the recent rule changes, please contact our office.