Effective May 13, 2019, the Internal Revenue Service (IRS) changed the requirements for obtaining an employer identification number (EIN). The IRS now requires that an individual with a social security number (SSN) or individual taxpayer identification number (ITIN) be named as the “responsible party” on IRS Form SS-4 (Application for Employer Identification Number), except in the case of federal, state, local, and tribal governmental entities (See IR-2019-58). Previously, an entity that owned the requesting entity could be named as “responsible party” and provide its EIN on the form. This change is likely to affect international investors in the real estate industry who form special purpose entities to acquire real property.
The instructions for Form SS-4 generally define a “responsible party” as the person who owns, controls or exercises sufficient control over the entity. The responsible party is often the owner, manager, officer, or trustee of the entity. For many entities controlled by non-U.S. persons, the only individual that is capable of satisfying the criteria of a “responsible party” is a non-U.S. person, but non-U.S. persons often do not have SSNs or ITINs. In the past, such entities could avoid this requirement in certain situations if there was an entity with an EIN to act as the responsible party.
The IRS’s new policy seeks to improve security and transparency, and it applies to both paper and electronic Form SS-4 applications. Notably, there is no change for tax professionals who may still act as third-party designees for entities and complete the paper or online applications on behalf of clients.
The IRS’s new policy is not likely to affect entities for which a U.S. resident is the responsible party, other than the data privacy concerns resulting from the requirement that the responsible party disclose its SSN on yet another form.
Entities controlled by non-U.S. persons will be impacted, however, since non-U.S. persons frequently do not have SSNs or ITINs. In such cases, the non-U.S. “responsible party” will need to apply for an ITIN using the IRS Form W-7 (Application for IRS Individual Taxpayer Identification Number) and provide relevant supporting documentation. The application process for an ITIN can take several weeks or more to complete and requires the responsible party to submit original documentation, such as an original passport.
Entities controlled by non-US persons should plan ahead, be proactive, and consult with experienced counsel. SheppardMullin has a team of professionals able to provide such counsel to assist in addressing the various nuances that the IRS’s new EIN processes pose for entities controlled by non-U.S. persons.