Your personal tax records are noted under your Social Security Number. That won’t work for businesses, so years and years ago the IRS came up with Employer Identification Numbers (EIN) to track business accounts. If you form a new business entity, you can obtain an EIN online. The system works well most of the time.
One of our clients, call him James Smith, formed an LLC back in 2007 in Arkansas: James Smith LLC. The LLC made a timely election to be treated as an S-Corporation, and all was well.
In 2010 Mr. Smith got married and moved south to Texas. He closed the first LLC and formed a new LLC, James Smith LLC. Yes, he used the same name. This LLC had two owners (Mr. & Mrs. Smith), and all was well. It was assigned a different EIN—as it should, given it was a different legal entity. This LLC, too, made an election to be treated as an S-Corporation.
Unfortunately, the marriage didn’t last, and Mr. & Mrs. Smith divorced in 2011. They agreed to close the LLC, and they did so, filing final tax returns in 2011. Mr. Smith, though, decided to continue his business and moved back to Arkansas. He formed a new LLC, and, yes, you’re already a step ahead of me, it was called James Smith LLC. He received a new EIN. This LLC also made an election to be taxed as an S-Corporation.
All was well until mid-2017. James Smith LLC was doing well, tax returns were all filed, and all taxes paid. In July 2017 the IRS made an inquiry regarding a payroll tax filing. My client uses one of the large payroll services for payroll, but somehow on a filing the information on one item got garbled in transmission. We replied, the IRS responded a few weeks later saying, “Thank you. We’ve closed our investigation into this matter.”
What we didn’t know is that the IRS employee who received the paperwork decided to help my client. He saw that there were previous EINs issued to James Smith LLC and changed the EIN within the IRS computer system back to the EIN of the Texas entity. Adding to the helpfulness, we were not notified of the change.
We discovered there was a problem when I attempted to efile the 2017 tax return (in 2018). The return would not be accepted. I called the IRS’s efile help desk and was told only what was on the IRS rejection notice was, “There’s a name/EIN mismatch.” Of course, neither I nor my client could figure that out, so we paper-filed the returns (federal and Arkansas).
A few months later we received a letter from the IRS saying we filed the tax return with the wrong EIN, and the EIN we should use is the Texas EIN. We wrote back protesting this, noting that EIN referred to a closed entity in a different state, and the new EIN is what should be used. The IRS’s response? “Use the old EIN.”
This has caused multiple issues with the IRS. We have multiple prior (to 2018) payroll tax mismatches. We were just notified this week by an IRS Revenue Officer that my clients Form 941 for the fourth quarter 2018 wasn’t filed. It was filed–timely—by one of the large payroll firms…but not under the Texas EIN. I explained everything to the Revenue Officer, but we still had to prepare a new Form 941.
There are multiple lessons here. First, if you close an entity and start a new one, change the name slightly. If my client had used James Smith & Associates, LLC for the Texas entity and James L Smith LLC for the new Arkansas entity, it’s probable none of this would have happened.
Second, the IRS absolutely should ask taxpayers before changing an EIN. Had that IRS employee asked us we would have explained why the old EIN couldn’t be used.
Finally, when a mess like this happens it will tend to linger for years. We still have four unresolved issues with the IRS all stemming from this helpfulness. While I do expect them to all be successfully resolved, this has added costs and stress for my client for no good reasons. And if you are reading some sarcasm in what I’m saying in this post, you’re right.