Using the New IRS Online Tax ID Application (by guest blogger, Megan Hughes, of Business First Formations, Inc.)

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Hi … my name is Megan and I’m guest blogging for Diane this week while she’s off doing great things with some kids down in Juarez, Mexico. She’ll be back around September 16th.

Applying for a Tax ID number online is nothing new – I’ve been doing it on behalf of my clients for years now.

But recently the IRS introduced a brand new application system. Instead of simply trying to fill in one of those confusing SS-4 forms, the new system asks you questions and completes the SS-4 for you, based on your answers.

The upside of this system is that it helps the IRS to more accurately classify your business activities. Diane has warned us repeatedly that being classified incorrectly can lead to an increased audit risk when the IRS is expecting your tax return to have XXX business expenses but it instead comes in with YYY expenses.

The downside to this system is that it’s still a little confusing, especially if you’re trying to get a Tax ID number for an LLC that will be electing S Corporation taxation status. When you get to the LLC business type, you’re presented with only two choices: single member or partnership.

The trick here is to understand that you’re not applying for corporation tax status right now. That’s done later, after the Tax ID number has been issued. So pick whichever one you want. If you, or you and your spouse are the only owners of your LLC, pick the single-member option. If you and someone else are the owners of your LLC, pick the partnership option. Then complete the rest of the application as normal.

Here are a couple more tips for using the new Tax ID Online application system:

  1. Just before your Tax ID number is issued you will be given a choice between receiving your IRS confirmation letter now, or later, in the mail. Pick the now option, and print the PDF letter off immediately, or save it on your computer’s hard drive. Occasionally you’ll need that letter to get a bank account opened, and it’s no fun to have your new business plan derailed for a couple of weeks while you wait for the IRS to get that letter out.
  2. If you get an error message that says you must call in, and report Error Code 101, don’t panic! All that means is that there are too many other businesses with similar names in the IRS’s system for it to be processed without human intervention. I recently had this happen and when I called in to do the application over the phone, I found that there were some 27,000 other businesses beginning with the same first word as my client’s business!
  3. If you get an Error Code 106, check your single-member versus partnership classification. Chances are you’ve reported the wrong number of member somewhere. You can only choose single-member disregarded LLC status if you are either the sole owner of the LLC or it’s just you and your spouse, and you file a joint tax return. Everything other combination MUST initially pick partnership taxation.

Remember the Follow Up!

Filing your Tax ID application is just half the process if you are setting up an S Corporation, or an LLC taxed as an S or C Corporation. To get the whole job done you’ll need to do the following:

(a) For S Corporations: Prepare and File a Form 2553 within 75 days of incorporation;
(b) For LLCs electing C Corporation tax status: Prepare and file a Form 8832 within 75 days of incorporation; or
(c) For LLCs electing S Corporation tax status: Prepare and file a Form 8832 and a Form 2553 within 75 days of incorporation.

You can file Form 2553 by fax or by mail, but the Form 8832 can only be filed by mail. This makes me a bit crazy, as I need to have the Form 8832 processed before I can file a Form 2553, but I’ve only got 75 days to get both pushed through the IRS system. What I’ve begun doing recently is sending a copy of my clients’ Form 8832 along with the Form 2553, and letting the IRS know that it was submitted on XXX date. And, when your business files its first tax return, it’s always a great idea to submit a copy of both forms (or just one, as the case may be) along with your tax return.

Use Certified Mail to Be Safe

Whenever I’m sending forms or other correspondence to the IRS, I always use certified mail, with a return receipt. That way I’ve got a record of the day I sent my letter, and the date it was received at the IRS. If I’m sending a fax, I always keep a copy of my fax transmission report, too. More than once I’ve had the IRS tell me “we didn’t get that on time,” and being able to immediately respond with “yes you did, and here’s the proof” is usually enough to get things done without further issue.

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