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The IRS May 2019 requirements for EIN applications (most websites are wrong)
Note: While the May 13th 2019 IRS update to the EIN Application affects all entities, this article is only focused on the EIN application process for LLCs. Specifically, we will discuss how this affects the following:
- LLC owned by an American citizen
- LLC owned by a non-US resident or non-US citizen
- LLC owned by a US company (owned by Americans)
- LLC owned by a US company (owned by foreigners)
- LLC owned by a foreign company
The IRS issued a news release (IR-2019-58) titled “IRS revises EIN application process; seeks to enhance security.”
This IRS update isn’t something new.
It’s rather just an “enforcement” of rules released around December of 2017 (that went into effect on January 1st 2018).
The EIN application rules (and “enforcement”) are as follows:
The EIN Responsible Party cannot be a company (a “legal person”). It must be an individual (a natural person).
And therefore, after May 13th 2019, the IRS is no longer accepting EIN Applications where an EIN is used for the Responsible Party.
(Prior to this, an EIN Responsible Party could either be a company or a person.)
The reason these new rules are only being “enforced” now is this is a major change to the way EINs have been obtained for many years.
The IRS allowed 15-16 months for the industry to become aware and make the necessary adjustments.
The two questions that matter
In this article, we will focus on the two biggest questions:
1. If an LLC is owned by another company, what Tax Identification Number should be used for the EIN Responsible Party?
2. If a US LLC is “foreign-owned” by a non-US resident or non-US citizen, how can they get an EIN for their LLC?
We will also discuss the 5 scenarios listed at the top.
What is an EIN Responsible Party?
An EIN Responsible Party is defined by the IRS in Form SS-4 instructions (see “Responsible Party Defined“):
“The ‘responsible party’ is the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity. The person identified as the responsible party should have 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. Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity.“
For more information on EIN Responsible Party, please see our article: who can be the EIN Responsible Party for an LLC.
What’s the confusion about?
While the new rules that an entity can’t be the EIN Responsible Party are straight-forward, the opening sentence of the May 13th IRS update has many non-US residents and non-US citizens confused:
“As part of its ongoing security review, the Internal Revenue Service announced today that starting May 13  only individuals with tax identification numbers may request an Employer Identification Number (EIN) as the ‘responsible party’ on the application.”
Additionally, there’s also this part:
“Individuals named as [the] responsible party must have either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN).”
What’s adding to this confusion is that most websites commenting on the IRS update are just copying and pasting what the update says instead of actually doing the research and figuring out how it affects all EIN applicants, especially those who don’t have an SSN or ITIN, but own (or want to form) a US LLC.
The main thing missing from this update is context.
The IR-2019-58 page fails to make any commentary about non-US residents and non-US citizens who don’t have an SSN or ITIN.
So the update is only “partially true”.
The IRS wanted to clarify that you can’t list an entity (and its existing EIN) on a new EIN application. This is correct.
The IRS used very confusing language (they are only speaking to people that have an SSN or ITIN; mostly Americans) and they made no comment about people who don’t have an SSN or ITIN.
So the part about “Individuals named as responsible party must have either an SSN or ITIN” is not correct.
Non-US residents and non-US citizens that have formed an LLC in the US can still obtain an EIN for their LLC. That has not changed.
If you formed an LLC and don’t have an SSN or ITIN, you can still get an EIN for your LLC by submitting Form SS-4 to the IRS by fax or mail.
On line 7b you’ll just write “Foreign”.
We have detailed instructions on how to complete form SS-4 here: how to get an LLC EIN without an SSN or ITIN.
Again, non-US residents and non-US citizens who form an LLC in the US can still get an EIN.
This has not changed. The May 13th IRS update does not affect non-US residents and non-US citizens obtaining EINs.
Let’s discuss a few other situations about who should be the EIN Responsible Party for an LLC.
LLC owned by American citizen(s)
When getting an EIN for an LLC owned by an American citizen (or citizens), one of the LLC Members must be the EIN Responsible Party. They’ll use their Social Security Number.
(related article: who can be LLC members)
LLC owned by a non-US resident or non-US citizen
When getting an EIN for a US LLC owned by a non-US resident or non-US citizen, one of the LLC Members must be the EIN Responsible Party.
Again, if the LLC Member doesn’t have an SSN or ITIN, they’ll just write “Foreign” on line 7b of Form SS-4.
Form SS-4 must be faxed or mailed to the IRS. Non-US residents and non-US citizens cannot apply for an EIN online.
LLC owned by US company (owned by Americans)
When getting an EIN for a US LLC owned by another US company (which is owned by Americans), you can no longer use the parent company’s EIN as the Responsible Party.
Instead, the IRS wants an owner of the parent company to be listed as the EIN Responsible Party using their SSN or ITIN.
LLC owned by US company (owned by foreigners)
The rules here are the same as an LLC owned by a non-US resident or non-US citizen.
Meaning, you can’t use the parent company as the EIN Responsible Party. Instead, one of the Members of the parent company must be the Responsible Party. And on line 7b of Form SS-4, they will need to enter “Foreign”.
Again, the online EIN application cannot be used. They must fax or mail Form SS-4 to the IRS.
These changes to the EIN rules are really about national security (not about preventing foreigners from forming US LLCs and opening bank accounts)
The US government, through various ways, has been strengthening national security to combat sanction evasion, money laundering, fraud, and tax evasion.
In our how foreigners can open a US LLC bank account article, we’ve spoken about the effects of the following:
- Customer Identification Program (CIP)
- Know Your Customer (KYC)
- Anti-Money Laundering (AML)
- Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act)
These are numerous rules and laws which require banks to know more about their customers.
Furthermore, in 2018, the Financial Crimes Enforcement Network (FinCEN) has enforced new regulations on banks and financial institutions for US bank accounts owned by LLCs. The banks are now required to obtain a Beneficial Ownership Declaration which states who the actual owners of an LLC are, whether they are American or non-American.
Due to all the above, it’s impossible for an LLC owned by non-US residents or non-US citizens to be opened remotely (the bank account must be opened in person by visiting the bank).
In fact, it’s impossible to open any (legitimate) US bank account remotely, whether you’re a US citizen or not.
(If you find a service that says they can open a bank account for you remotely, there’s a 99% chance it’s a scam… and the person opening the account for you has the ability to steal your money.)
In 2017, we also saw new requirements for foreign-owned Single-Member LLCs needing to file Form 5472 and Form 1120 every year. This information is required to be submitted to the IRS every year. If not, there are large penalties.
Form 5472 closes a “loophole” where foreign-owned Single-Member LLCs didn’t need to file an informational return with the IRS.
(Foreign-owned Multi-Member LLCs don’t have this loophole since they need to file Form 1065, an informational return, every year.)
The US just wants to know who is doing business here and wants to prevent people from committing financial crimes against the US government.
Nothing has changed for how an EIN is obtained by non-US residents or non-US citizens who own US LLCs.
However, if a company owns another company, it can no longer use its existing EIN on the new EIN application and the parent company cannot be listed as the EIN Responsible Party.
The IRS requires a person (“the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity“) to be listed as the EIN Responsible Party.
Ultimately, the US government doesn’t want to prevent foreign investment from coming into the US. They just want to prevent financial crimes.
IRS: How to Apply for an EIN
IRS: Internal Revenue Bulletin: 2013-23
IRS: Responsible Parties and Nominees
IRS: Instructions for Form SS-4 (12/2017)
IRS: Online EIN Frequently Asked Questions
IRS: IRS revises EIN application process; seeks to enhance security
Internal Revenue Code: 26 US Code Section 6109, Identifying numbers
Internal Revenue Code: 26 CFR Section 301.6109-1, Identifying numbers