Editor: Valrie Chambers, Ph.D., CPA
Practice & Procedures
Employer identification numbers (EINs) are federal tax identification numbers assigned by the IRS to certain entities and individuals. The process of obtaining this number has become much easier in recent years and normally does not present any problems for the practitioner. This item reviews the few issues practitioners may face, including who needs a number and who does not; procedures for obtaining the number; answers to questions on Form SS-4, Application for Employer Identification Number; dealing with a lost or unknown number; and verifying numbers for information-reporting purposes.
Generally, the IRS requires businesses or, in certain cases, individuals to obtain an EIN if they will have employees; are a partnership or corporation, including a not-for-profit; are required to file employment, excise, or alcohol, tobacco, and firearms tax returns; are required to withhold taxes on income other than wages paid to a nonresident alien; establish a qualified retirement plan; open an estate; or engage in any of several other activities. Additionally, opening an account at a financial institution requires a number matching the business name. In some cases, obtaining an EIN should prompt the practitioner to inquire of the resident state if a unique state number is also required. Also, for tax-exempt organizations, the EIN is not a tax-exempt number. That term generally refers to a number assigned by a state agency for sales or use tax purposes.
Until an EIN is obtained, many important business functions will be delayed, including use of the Electronic Federal Tax Payment System and filing of election forms and returns. This could result in penalties. If, by the time a tax deposit is due, the client does not have an EIN, payments should be sent to the IRS Service Center where the client files, with a notation that the EIN has been applied for and the date.
EINs can be applied for online, by fax, by mail, or by phone. The variety of choices and the instantaneous results from the online process should make a number available as needed. Practitioners should note that effective May 21, 2012, the IRS limited the number of EINs issued to one per responsible party per day. This change was made, according to the IRS, to ensure fair and equitable treatment for all taxpayers. For practitioners accustomed to obtaining several numbers at once, this has created a planning issue. In the event a return filing is due, attach a completed SS-4 to the signed tax return and mail both forms to the appropriate address. Applications by fax are supposed to receive a four-business-day turnaround and those sent by mail at least a four- to five-week turnaround. Telephone applications are for international applicants. One other limitation of the online application occurs if the responsible party is an entity with an EIN previously obtained through the internet. In this case, fax or mail methods are required. Clearly, this situation creates an e-file exception for many, so advance planning is necessary.
If a business previously obtained an EIN but has misplaced or lost the number, it can try to locate the original confirmation. The business should inquire with the bank where accounts were opened, because banks require an EIN verification in most cases, or try to locate a previously filed return. As a last resort, the taxpayer can call the IRS Business and Specialty Tax Line at 800-829-4933. After verifying the caller’s identity, this service will provide the number to an authorized person.
Several events in a business’s life require a new EIN. Generally, a sole proprietor needs only one EIN, regardless of the number of businesses operated and Schedules C, Profit or Loss From Business (Sole Proprietorship), filed. However, if a sole proprietor legally changes its form of business to a corporation or a partnership, a new EIN is required.
More troublesome is the entity that elects to change its status for tax purposes but not its legal form of business. This election on Form 8832, Entity Classification Election, permits a business entity to change its classification for tax purposes only. The instructions to Form 8832 clearly state that any entity that has an EIN will retain that EIN even if its federal tax classification changes under Regs. Sec. 301.7701-3.
Obviously, an entity that does not have an EIN must apply for one on Form SS-4 before completing Form 8832. If a disregarded entity (sole proprietor or single-member LLC) changes its classification so that it becomes treated as a partnership or association and it had an existing EIN, then it must continue to use that EIN. If the disregarded entity did not have an EIN, it must apply for one and not use the identifying number of the single owner. Although some may feel a new EIN provides more evidence of a change in entity and some level of creditor protection, an election pursuant to these regulations is merely a tax election—the legal status of the entity does not change. A business that is subject to a bankruptcy proceeding also needs a new EIN.
Care should be exercised when completing Form SS-4 because the choices made will determine the tax returns the IRS expects. Indicating a business will have employees in the first quarter means the IRS will expect employment tax returns for that period even if there are no employees. A failure to file will result in a notice of nonfiling and require a response.
Another problem frequently encountered by practitioners and clients is verifying an EIN for a vendor, contractor, or other entity. Using an incorrect number on any tax form can result in a need to execute backup withholding procedures. The IRS offers a prefile service to verify and match EINs for tax practitioners through its e-services website. This service is available to payers and agents that submit any of six information returns. The interactive matching now allows payers to match up to 25 EIN and name combinations against IRS records before submitting returns, which can save valuable resources in the event of errors. Online tutorials are available after logging into e-services and in Publication 2108A, On-Line Taxpayer Identification Number (TIN) Matching Program.
On May 3, 2013, the IRS issued final regulations (T.D. 9617) that require all employers with EINs to provide updated information to the IRS in a prescribed manner. The regulations went into effect Jan. 1, 2014, and require current, accurate information about the taxpayer and its responsible parties within 60 days of a change. The IRS published a new Form 8822-B, Change of Address or Responsible Party—Business, for EIN applicants to use in connection with the updated information. This procedure pertains primarily to entities that listed nominees temporarily authorized to act on an entity’s behalf. The IRS hopes the new regulations will improve its ability to determine the correct ownership details and proper responsible individuals as well as prevent fraud and abuse. Although the form is described as mandatory, the instructions state that failure to file the form will not result in penalties.
EINs can have important tax implications for businesses. This number and information on the Form SS-4 is shared with the Social Security Administration as well as other federal and state agencies. A federal EIN will never be reused in the event a business is closed.
Valrie Chambers is a professor of accounting at Texas A&M University–Corpus Christi in Corpus Christi, Texas. Matthew Yuskewich is founder of the Winterset Group CPAs Inc. in Columbus, Ohio. Mr. Yuskewich is a member of the AICPA IRS Practice & Procedures Committee. For more information about this column, contact Prof. Chambers at firstname.lastname@example.org..