"Responsible party" is a tax term for the individual who makes decisions for a business. The IRS changed Item 3 on IRS Form SS-4, the "Application for an Employer ID Number (EIN)," in 2019 to distinguish between a "nominee" and a company's responsibility party.
The IRS issued a clarification due to confusion regarding the term "responsible party" on the EIN form. The application asks for the identity of the responsible party instead of requesting that the applicant identify the "principal officer, general partner, grantor, owner, or trustor" in Question 3.
What Is a Responsible Party?
The IRS defines the responsible party for public companies as the principal officer of a corporation, a general partner of a partnership, the owner of a disregarded entity, or a grantor, owner, or trustor of a trust.
Multiple partners might qualify as the responsible party in the case of a partnership. You can select the person you want the IRS to recognize and contact as the responsible party in this case.
For all other business entities, the responsible party is the person who controls, or is entitled to control, the company's funds or assets. It's the individual who manages or directs the entity and the "disposition of its funds and assets." The IRS wants you to identify "the true principal officer, general partner, grantor, owner or trustor," not an attorney who isn't an owner, director, or partner of the company.
A responsible party must be an individual, not a business, unless a government entity is applying for an EIN.
How Does A Responsible Party Work?
A business's responsible party is, quite simply, the contact person within the organization for tax purposes. They accept and deal with IRS correspondence and questions. They can apply for the business's EIN.
The IRS requires that individuals who are applying for an EIN must enter the Social Security Number or ITIN for the responsible party on Form SS-4 effective May 2019.
Responsible Party vs. Nominee
A nominee is given little or no authority over the entity’s assets. It's someone who has limited authority to act on behalf of a business entity, usually for just a defined period of time, often during the formation of the entity. They're often non-employee attorneys who are helping to set up the company.
The IRS no longer allows nominees to be designated as responsible parties for purposes of applying for an EIN. The IRS wants to be certain that the person they contact with regard to the company is someone who can make all decisions on the business's behalf.
|Owns or controls and directs the business entity||Has limited authority to act for a business for an isolated purpose|
|Controls the disposition of the entity's assets and funds||Does not have control over the company's assets and funds|
|Can interact with the IRS for purposes of securing an EIN||Not recognized by the IRS for purposes of securing an EIN|
How to Change Your EIN Form to Your Responsible Party
You must change your responsible party designation if you don't have the correct person identified in Item 3. You can use Form 8822-B to make this change.
The instructions for the form include the correct IRS addresses to use to send in the change. The IRS announced changes in filing addresses for Form 8822-B effective January 1, 2019. The address you would use depends on your state.
- A responsible party is the individual who controls and manages a business entity and its funds and assets.
- The IRS made a distinction between a responsible party and other individuals for purposes of securing an EIN in 2019.
- A business entity can select the person they want to act as their responsible party in business formations where multiple individuals control and manage the business, such as partnerships.
- Businesses must change the “nominees” to “responsible parties” on IRS Form 8822-B if they haven’t already made this change.
NOTE: Tax laws change periodically. You should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.