By Kevin F. Israel
In a move aimed at improved security and transparency, the IRS recently revised the process to apply for an Employer Identification Number (EIN), limiting the naming of the “responsible party” for the applicant to individuals.
Effective in May, entities, such as corporations and limited liability companies, will no longer be allowed to be named as responsible parties in EIN applications. Before the new IRS policy, such entities could be labeled as a “responsible party” on the EIN application of a newly formed entity.
A responsible party is generally defined as someone who owns or exercises effective control over the entity and has a Social Security number (SSN) or individual taxpayer identification number (ITIN). Newly formed entities are allowed to decide on their own which person will be their responsible party if there are two or more people who meet the definition, while future changes to the responsible party designation can be made with Form 8822-B.
Notably, the requirement, which became effective May 13, only pertains to new EIN applications made via Form SS-4 or online. Government entities and the military are exempt from the change.
The change could have a significant effect on international entities that are seeking an EIN but may not immediately have a responsible party with an SSN or ITIN, which is a nine-digit number assigned by the IRS to individuals who are not eligible for an SSN for U.S. tax law purposes. ITIN applicants must complete Form W-7, and the wait for that form to process likely will delay an international entity in getting an EIN.
EINs are required not only for tax return reporting but for many of an entity’s basic administrative duties, such as opening a bank account or applying for licenses. New EINs are also needed when an existing business changes its structure (sole proprietorship becoming a corporation, mergers, etc.).
Going forward, businesses and other entities must make a decision on who best meets the definition for “responsible party” before applying for a new EIN. For assistance in that assessment, questions over whether an existing entity needs a new EIN or other matters related to entity formation and businesses, please contact Kevin F. Israel at [email protected].