Head’s Up! IRS Just Revised EIN Application Procedure & Foreign Taxpayers Will Struggle

Effective as of May 13, taxpayers can no longer request an employer identification number (EIN) unless the “responsible party” named on the application has either a Social Security Number (SSN) or Individual Taxpayer Identification Number  (ITIN). Only governmental entities and the military are exempt from this requirement, and may continue to list non-individual entities as the “responsible party”.  An EIN is a nine-digit tax identification number assigned to sole proprietors, corporations, partnerships, estates, trusts, employee retirement plans and other entities for tax filing and reporting purposes.

This change was announced by the Internal Revenue Service as an enhanced security and “transparency” measure and it will apply to both the paper and online EIN application.  There is now a new version of Form SS-4, Application for Employer Identification Number (PDF).

Responsible Party

Form SS-4 Instructions (PDF) provide a detailed explanation of who should be the responsible party for various types of entities. Generally, the responsible party is the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity. In cases where more than one person meets that definition, the entity may decide which individual should be the responsible party. In deciding who to list as the responsible party, the IRS encourages applicants to consider whether the party has “a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the person, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets.”

“Check-the-Box” Exception No Longer Applies

The change will prohibit entities from using their own EINs to obtain additional EINs. Prior to this change and on the earlier version of the Form SS-4, those applying for the EIN were not required to provide a SSN or ITIN if the sole purpose for obtaining an EIN for a business entity was to file IRS Form 8832, Entity Classification Election (i.e., a “check-the-box” election) to change the entity’s classification for federal tax purposes. The most recent version of the Form SS-4, shows that the IRS has eliminated this exception for “check-the-box” elections.  This means that generally every responsible party must have either an SSN or ITIN, even in the mundane case where the applicant wishes only to change an entity’s tax classification.  This change will now significantly affect the timing of check –the-box elections for many foreign entities and thus, will impact various US tax elections that involve planning for non-US taxpayers.

Advance Planning

With respect to many tax elections, timing is everything.  The application process for an ITIN is quite cumbersome and can take several months to complete, so it may behoove taxpayers to re-examine their situations and see if applying for an ITIN may be in order.  This may be required to ensure that time-sensitive elections are not delayed because the responsible party does not have an ITIN or SSN.  As an example, we often see “check-the-box” planning used with estates of foreign persons when assets in the estate include stock of a foreign corporation that will be inherited by US persons. In this case, it is often desirable for the foreign corporation itself to make a check-the-box election with an effective date on or prior to, the date of death. Making the election permits the taxpayer to “step up” the basis of the corporation’s underlying assets and prevents application of the foreign anti-deferral rules (e.g., the “controlled foreign corporation” regime) to the US persons inheriting the shares. Similarly, this issue arises when the foreign owner  is planning to gift or sell shares of the foreign corporation to US persons.

Tax Pros

The IRS has stated that there is “no change” for tax professionals who act as third-party designees for entities and complete the application process. This means that tax professionals will not have to provide their own social security numbers in the EIN application  process.

Posted April 23, 2019

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