How many times have you filed Federal Form SS-4 to secure an EIN number for your client’s new entity?
In the past, a client would request that you begin the formation of an entity as a Trust, IBC, foreign or domestic corporation. The client is usually in a hurry to get the entity set up, and either you or an incorporation company will draft the deed or articles of incorporation. If you are acting as the incorporator then you immediately have the true owners of the entity sign off by indemnifying your representations made to secure the corporate or trust formation. However, there is generally not a second thought as you get on the internet and obtain the EIN number for the entity so bank accounts can be secured to allow the entity to financially begin business.
As of this week, the Internal Revenue Service has enacted regulations that severely affect the use of Nominees in the EIN application process. The IRS believes that there is abuse in this application process wherein Nominee individuals are being listed as principal officers, general partners, grantors, owners, and trustors in the Employer Identification Number (EIN) application process. However, in reality a Nominee is a person who is only limited in time and scope to act on behalf of entities during the formation process. In the continuing efforts of the Internal Revenue Service to find transparency, the Service has now announced that the use of a Nominee to obtain the EIN frustrates the accumulation of information on entity ownership and does not comply with the instructions for completing and filing the SS-4 form. Therefore, the Service now alleges that use of Nominees to obtain EINs, whether by mail, fax, phone, or electronic, are not permitted and that the Nominee must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner or trustor.
Interesting and frighteningly so, the Service deems the Nominee as the “Responsible Party” that controls, manages, or directs the applicant entity and the disposition of its funds and assets. What makes this so frightening is that the term “Responsible Party” has other meanings within the Internal Revenue Code.
Responsible Party is mentioned in reference to IRS form 3520 as the: grantor in the case of the creation of an inter vivos trust, transferor, in the case of a reportable event other than a transfer by reason of death, or executor of the decedent’s estate in any other case (whether or not the executor is a U.S. person). However, a Responsible Party can also be subject to huge and unfair penalties in the normal operations of any business and tax-exempt organization that is required by law to collect and pay over to the IRS the income, Social Security and Medicare taxes that are required to be withheld from the salaries and wages of its employees. If the business or tax-exempt organization fails to pay over these “trustee taxes” (i.e., they are held in trust for the government), the law requires the persons responsible for the financial affairs of the organization (the “Responsible Parties”) to pay these taxes out of their personal funds. This collection process is known as the “100% penalty.” Although pursuant to Federal regulations, only the unpaid trust fund taxes are recoverable from Responsible Parties: many States also hold the Responsible Parties responsible for penalties and interest on the unpaid trust fund taxes.
If you are now feeling uneasy about the financial responsibilities that you have unknowingly taken on by filing the SS-4 on your client’s behalf; the Service has also provided a procedure for removing this potential liability from the Nominee by first acknowledging that a properly filed SS-4 will be signed by the true Responsible Party. If you are a third party designee filing an online application, then you are obligated to retain a complete signed copy of the paper Form SS-4 and signed authorization statement for each entity application filed with the Service. Remember, Nominees do not have the authority to authorize third party designees to file Forms SS-4 and should not be listed on the Form SS-4.
If as a Nominee you are utilized as a part of the entity’s state formation process and the true Responsible Party has not yet been identified, the entity must identify that individual before applying for an EIN and should send the IRS a letter providing the name and Taxpayer Identification Number (Social Security Number, Employer Identification Number, or Individual Taxpayer Identification Number) of the true Responsible Party. Entities that submitted applications that showed, as the principal officer, an individual or entity that is not or now is not the true Responsible Party should update the entity’s information. Note: There is currently no form existing that will allow for updating this information. The Service is requesting that the updating not be made by filing a second EIN application. At this point in time, the Service is requesting that the entity itself submit a letter on company letterhead that provides the name and Taxpayer Identification Number of the current principal officer, general partner, grantor, owner, or trustor.
The Service is continuing to find ways to apply its definition of transparency as well as generating revenues by increasing penalties. This initial part of their effort to find the true Responsible Party is, I believe, a part of these two functions. Whether lawyers, C.P.A.s or Enrolled Agents want to become liable as Responsible Parties, will need to be thought through as we continue our business of representing clients and their wishes. Whether the Service will seek to make the jump between Responsible Party for EIN purposes to that of Responsible Party for payroll taxes and Form 3520 has yet to be seen.