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Part 5. Collecting Process

Chapter 1. General Collecting Procedures

Section 21. Collecting from Limited Liability Companies

5.1.21  Collecting from Limited Liability Companies

5.1.21.1  (02-19-2008)
Introduction

  1. A limited liability company (LLC) is a hybrid entity created under state law that has characteristics of both a partnership and a corporation. It is similar to a

    • corporation in that the owners have limited personal liability for negligent acts and LLC debts.

    • partnership in that it provides management flexibility and may provide the benefit of pass-through taxation of income.

  2. An LLC may own property, enter into contracts and otherwise conduct business in its own name. Property ownership is governed by state law.

  3. The classification of the LLC under applicable Treasury Regulations will determine the LLC's treatment for tax purposes and, correspondingly, the entity against which administrative collection actions may be taken.

  4. Treatment of the LLC entity for federal taxes is governed by the provisions of Treas. Reg. 301.7701-2 and 3. Liability for income, employment, and excise taxation is determined by the manner in which the entity is classified under the applicable regulations. To properly address various collection questions, you must first understand how an LLC is classified. Also see Notice 99–6and IRM 5.1.21.5.7.

    Note:

    Final regulations changing the treatment of certain LLCs for employment and excise tax liabilities were issued on August 16, 2007. The changes are not retroactive; they do not change the tax treatment of employment and excise taxes that accrue prior to their effective dates. The applicability of these regulations must be considered when determining liability for employment and excise taxes incurred both before and after the effective dates of these regulations. See IRM 5.1.21.5.6.

  5. Because the classification may change without any indication in the record of assessment, the LLC presents challenges to collection employees. This handbook discusses a number of investigative techniques to allow the employee to make a collection determination.

  6. Classification of the LLC for federal tax purposes does not negate state law provisions concerning the legal status of the LLC. For example:

    • Classification of an LLC as a partnership does not mean the member/owners have liability for LLC debts as would be the case in a state law partnership.

    • Under certain circumstances, an LLC may be disregarded as an entity separate from its owner. This classification does not mean that an LLC owned by an individual is the equivalent of a sole proprietorship.

  7. Because state law governs an LLC's property rights, which may be different from that of a corporation or a partnership, the administrative collection actions that may be taken may also differ. Collection employees must keep these concepts in mind.

5.1.21.2  (02-19-2008)
Characteristics of a Limited Liability Company (LLC)

  1. State LLC statutes include a number of common elements and characteristics, many of which are different from other types of business organizations.

  2. The following are some of the characteristics of an LLC:

    • Owners are called members.

    • There are no restrictions on ownership.

    • There are no restrictions on the number of members.

    • Single member LLCs are permitted.

5.1.21.2.1  (02-19-2008)
Member/Owner

  1. A member/owner is a person with an ownership interest in the LLC. The term "person" includes legal entities. Thus, a member/owner may be:

    • an individual

    • a corporation

    • a partnership

    • an association

    • an estate

    • a trust

    • another LLC

  2. An LLC with one owner is a single member entity.

  3. An LLC with more than one owner is a multi-member entity.

  4. The treatment of an LLC for tax purposes may depend in part on whether the LLC is a single member entity or a multi-member entity.

5.1.21.3  (02-19-2008)
Classifications Available to LLC Entities

  1. Treas. Reg. 301.7701-3 specifies the classifications available to foreign and domestic eligible entities by election or default.

5.1.21.3.1  (02-19-2008)
Classifications Available for Entities Filing an Election

  1. Domestic and foreign eligible entities, including LLCs, may elect classifications by filing Form 8832, Entity Classification Election.

  2. A multi-member LLC may elect to be classified as

    • a partnership, or

    • an association taxable as a corporation.

    Note:

    A multi-member entity cannot elect disregarded entity status.

  3. A single member LLC may elect to be classified as

    • an association taxable as a corporation, or

    • an entity disregarded as separate from its owner.

    Note:

    A single member entity cannot elect partnership status.

  4. An association taxable as a corporation may further elect to be classified as an S corporation by filing Form 2553, Election by a Small Business Corporation. If an LLC that meets all other requirements to qualify as an S corporation timely files a Form 2553, it is treated as having made an election to be classified as an association without completion of Form 8832.

5.1.21.3.2  (02-19-2008)
Default Classification of Entities Not Filing an Election

  1. A domestic multi-member LLC that has not filed an election is classified by default as a partnership for federal tax purposes.

  2. A domestic single member LLC that has not filed an election is classified by default as an entity disregarded as separate from its owner for all federal income tax purposes, for employment taxes that accrue prior to January 1, 2009, and for certain excise taxes that accrue before January 1, 2008.

  3. Unless an election is made on Form 8832, a foreign eligible entity is

    • classified as a partnership if it has two or more members and at least one member does not have limited liability

    • classified as an association taxable as a corporation if all members have limited liability, or

    • disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.

  4. For excise tax liability imposed and actions required or permitted in periods beginning on or after January 1, 2008, and for employment tax liability on wages paid on or after January 1, 2009, a single member LLC that has not filed an election will be treated as an entity separate from its owner.

5.1.21.3.3  (02-19-2008)
Community Property Considerations

  1. Rev. Proc. 2002-69 provides guidance on the classification for federal tax purposes of an entity that is owned solely by a husband and wife as community property under the law of a state, and that has not elected to be treated as an association taxable as a corporation.

  2. The revenue procedure provides that the Service will respect a taxpayer's treatment of these entities.

    • If the husband and wife treat the wholly owned LLC as a partnership for federal tax purposes and file the appropriate partnership returns, the Service will accept the position that the entity is a partnership for federal tax purposes.

    • If they treat the LLC as a disregarded entity for federal tax purposes, the Service will accept that position.

  3. A change in reporting position is treated as a conversion of the entity for federal income tax purposes. There is no restriction on the timing or frequency of changing reporting position and the resulting conversion from disregarded entity to partnership or from partnership to disregarded entity.

  4. The identity of the taxpayer liable for certain excise taxes that accrue prior to January 1, 2008, and for employment taxes that accrue prior to January 1, 2009, changes concurrently with this change in classification.

  5. Limitations on the filing of amended returns resulting in classification changes are no different from limitations on other amended returns. This may present unique challenges for determining the taxpayer liable for employment and excise taxes. For example, the filing of the partnership return may occur after the employment tax liability is incurred. Should questions of liability arise in these circumstances, seek the assistance of Area Counsel.

  6. The provisions of Rev. Rul. 99-5 (regarding conversion from a disregarded entity to a partnership) and Rev. Rul. 99-6 (regarding conversion from a partnership to a disregarded entity) provide guidance on the income tax consequences of conversions.

5.1.21.3.4  (02-19-2008)
Examples of LLC Ownership and Classification

  1. As noted above, state law allows for a very broad range of ownership possibilities for an LLC. The following examples are not all-inclusive but indicate the complexities that may be encountered in determining ownership. For example:

    • The Stanford Corporation formed Stanford Getaways LLC. Stanford Corporation is the single member/owner of the LLC.

    • Donald Drake is the owner of Drake's Restaurant LLC. The LLC is a single member entity.

    • Forsyth LLC is the sole owner of ten separate LLC entities, Forsyth Ventures 1 LLC; Forsyth Ventures 2 LLC; etc. Each LLC is a single member entity that has never filed an election and is a disregarded entity of Forsyth LLC . Investigation reveals that Forsyth LLC itself is owned by another single member LLC, Grand Forsyth LLC, that is itself a disregarded entity of the Forsyth Corporation. Each of these LLCs is a single member disregarded entity with Forsyth Corporation being the ultimate owner.

    • Macon Family Trust and Randolph Macon are the member/owners of Macon LLC. The LLC is owned by two legal entities and is therefore a multi-member LLC.

    • Michael Cornell and Patricia Harvard own the state law partnership, M & P. The partnership owns 100% of Mikepat LLC. The LLC is owned by one legal entity, M & P, and is therefore a single member LLC.

    • Andrew Bucknell and Howard Clemson are partners in Buckson Partnership. The partnership purchases a 25% interest in the Mikepat LLC in the previous example. The LLC now has two legal entities as owners, making it a multi-member LLC. (See Rev. Rul. 99–5 for the consequences of this conversion.)

      Note:

      Employees should be alert to the possibility that layers of LLC ownership may not indicate a legitimate business purpose. In some of the examples above, additional facts would need to be examined to determine if alter ego and/or nominee issues might be raised.

5.1.21.3.5  (02-19-2008)
Using Internal Sources to Determine Classification

  1. Useful information regarding the ownership and classification of an LLC may be obtained by accessing various Integrated Data Retrieval System (IDRS) command codes or by retrieving copies of forms filed by the taxpayer. For example:

    • IDRS command code ENMOD may include a name line indicating membership.

    • IDRS command code BMFOLE may reveal the name of owner(s), filing requirements, and will confirm any elections made, including effective date and classification elected.

    • Form 8832, Entity Classification Election,may indicate the number of owners and requires the signature of each member or the authorized manager.

    • Form 2553, Election by a Small Business Corporation, requires the signature and taxpayer identification number (TIN) for each member.

    • Form 1065,U.S. Return of Partnership Income, or Form 1120S, U.S. Income Tax Return for an S Corporation, includes Schedule(s) K-1 with the name, address and TIN for each owner.

  2. Verifying classification prior to initial contact will help you identify requirements for a full compliance check and determine if a trust fund recovery penalty investigation is applicable. Check IDRS command code BMFOLE for the following transaction codes to determine whether or not the LLC has made an election:

    • A TC 076 indicates the date the Form 8832, Entity Classification Election, was accepted by the campus, the effective date of the election, and the classification elected. The alphabetic indicators " a" through "f," showing after PARA-CD, corresponds to the box checked on the Form 8832. The alphabetic indicator " z" will appear if the Form 2553 is filed per IRM 5.1.21.3.1(4).

    • A TC 090 indicates the acceptance of Form 2553, Election by a Small Business Corporation, and includes the effective date of the election and the fiscal year month for the entity. If only the Form 2553 is filed per IRM 5.1.21.3.1(4), both the TC 076 and TC 090 will appear on the entity.

  3. If these transaction codes are not present, then no election has been made. The LLC is subject to the default classifications in the regulations.

  4. A filing requirement on BMFOLE for Form 1065 does not necessarily indicate that the taxpayer is a multi-member LLC classified as a partnership.

    • If the campus cannot determine the number of member/owners of the LLC, a Form 1065 filing requirement is opened when the entity is established on IDRS.

    • The membership of the LLC may change at any time. The taxpayer is not required to notify the Service of ownership changes, but the default classification and filing requirements may change concurrently with a change in ownership.

5.1.21.3.6  (02-19-2008)
Using External Sources to Verify Classification

  1. Information to determine the number of member/owners of an LLC may be secured from external sources including:

    • Records required by state statutes governing LLCs

    • Records from the Secretary of State (or equivalent official)

    • Direct contact with the taxpayer

  2. Basic familiarity with state LLC statutes is required to help determine:

    • Information available from the Articles of Organization or similar documents

    • Requirements imposed on the LLC to maintain ownership information

    • Other record-keeping requirements for the LLC

    • Provisions for dissolution and reinstatement of the LLC

  3. Available information from the Secretary of State or equivalent includes

    • Articles of Organization or similar document

    • Initial and annual reports

      Note:

      Most state statutes do not require the LLC to provide complete ownership information to the Secretary of State or equivalent.

  4. According to the Uniform Limited Liability Company Act of 1995, the LLC is officially formed at the time the Articles of Organization are signed and delivered to the state official designated as the receiving official (Secretary of State or equivalent). In some states the Articles of Organization are known as the Certificate of Formation or Certificate of Organization. A copy of the document may provide:

    • An address for the LLC

    • The name, TIN, signature, telephone number, or address of each organizer or of one or more of the member/owners

    • Bank of the LLC

    • Type of business activity

  5. Many states require an LLC to file an annual report with the designated state official. Reports may include:

    • Name and address of the registered agent for the LLC

    • Principal business address of the company

    • Name of the manager of the LLC

    • Names of one or more of the members

  6. Provisions for Operating Agreements vary widely according to state law. They may be known as Limited Liability Company Agreements or By-laws and are optional in some states. These documents are not generally required to be filed with the Secretary of State's office. Many states allow them to be written or oral.

  7. The Operating Agreement may provide some or all of the following information:

    • Responsibilities of the members within the LLC

    • Name and address of one or more of the members

    • Signature of the members that adopted the Operating Agreement

    • Name of the attorney that drafted the Operating Agreement

    • Name and address of one or more of the managers

    • Initial capital contributions

    • Initial shares

    • Powers of the manager as signatory on bank accounts

  8. Most state statutes require the LLC to maintain complete ownership records and other information at the place of business. Often the LLC is the most useful source of information. Secure as much information as possible on the initial contact. This includes some or all of the following:

    • Number of members of the LLC

    • Name(s), address(es), and TIN(s) of all members, along with the dates of ownership and the amount of their interest in the LLC

    • Information regarding the designation of a manager of the LLC, if applicable, along with the dates of service and a record of the manager's responsibilities

    • Copy of the Operating Agreement, if one exists

    • Minutes of meetings of members of the LLC

    Note:

    If supporting documentation is not readily available to determine the number of members of an LLC that made no elections, consider issuing a summons for original documents or securing a statement from the member(s) signed under penalty of perjury.

5.1.21.3.7  (02-19-2008)
Changes in Election or Ownership

  1. An LLC can elect to change its classification, but cannot make a subsequent election for a period of sixty months after the effective date of a prior election. Exceptions to the general rule include:

    • a request for a private letter ruling that allows reclassification within the period of the sixty month limitation

    • the previous election was made by a newly formed entity and was effective on the date of formation.

  2. Changes in the number of owners may affect the classification of an LLC as follows:

    • An LLC classified as a partnership becomes classified as a disregarded entity when the LLC's ownership is reduced to one member.

    • An LLC classified as a disregarded entity becomes classified as a partnership when membership increases to more than one member.

    • See Rev. Rul. 99-5 (regarding conversion from a disregarded entity to a partnership) and Rev. Rul. 99-6 (regarding conversion from a partnership to a disregarded entity) for income tax ramifications of these conversions.

  3. A change in ownership that affects the LLC's classification is not an elective change, so there is no sixty month limitation on the frequency of such changes.

  4. An LLC classified as an association taxable as a corporation retains its same classification regardless of any change in the number of members.

5.1.21.3.7.1  (02-19-2008)
Examples of Classification Changes by Ownership or Election

  1. For employment tax periods which accrue prior to January 1, 2009, the identity of the liable taxpayer may change under a variety of circumstances. For example:

    • Elise Eagle was the sole owner of Eagle Enterprises LLC , which had made no elections. On January 1, 2008, Timothy C. Hawk acquired a partial ownership interest in the LLC. The employment tax liabilities were reported on Forms 941 in the name of Eagle Enterprises LLC for all quarters of 2007 and 2008. For the 2007 Forms 941, Eagle Enterprises LLC was a single member LLC, classified as a disregarded entity; Elise Eagle was the employer and liable taxpayer. When Timothy C. Hawk became a member on January 1, 2008, Eagle Enterprises LLC became a multi-member LLC, classified as a partnership. Eagle Enterprises LLC is the employer and the liable taxpayer for 2008 Forms 941.

    • Perry Parrot and Robert Raven owned Birdfeeders LLC, which made no elections. Birdfeeders LLC was classified as a partnership, and the LLC was the employer and liable taxpayer. On July 1, 2007, Raven sold his interest in the LLC to Parrot, and it became a single member LLC, classified as a disregarded entity. Employment taxes were reported in the name and EIN of Birdfeeders LLC for all four quarters of 2007. Birdfeeders LLC was the employer and the liable taxpayer for Forms 941 for 200703 and 200706. Perry Parrot is the employer and liable taxpayer for Forms 941 for 200709 and 200712.

    • Judy Goldfinch was the sole owner of Goldie’s Garage LLC, which made no elections and was classified as a disregarded entity. The LLC filed a Form 8832, Entity Classification Election, electing to be treated as an association taxable as a corporation, effective January 1, 2008. Employment taxes were reported in the name and EIN of Goldie’s Garage LLC for all quarters in 2006, 2007 and 2008. Goldfinch is the employer and liable taxpayer for Forms 941 for 2006 and 2007. Goldie’s Garage LLC is the employer and liable taxpayer for 2008 Forms 941.

    • Margie Mockingbird and Thomas Osprey formed Mockingbird LLC on January 1, 2006, and made no elections. The LLC filed a Form 8832, electing to be classified as an association taxable as a corporation, effective January 1, 2007. On October 1, 2007, Ms. Mockingbird purchased Osprey’s interest in the LLC. Employment taxes were reported in the name and EIN of Mockingbird LLC for all quarters in 2006, 2007 and 2008. Mockingbird LLC was classified as a partnership for 2006 and was classified as an association taxable as a corporation beginning January 1, 2007. Mockingbird LLC is the employer and liable taxpayer for Forms 941 for all quarters of 2006, 2007 and 2008. Since the LLC is classified as an association taxable as a corporation, the change in ownership does not affect its classification.

    • Warren Wren was the sole owner of Wren’s Automotive LLC, which filed a Form 8832, effective January 1, 2001, electing to be classified as an association taxable as a corporation. The LLC filed another Form 8832, effective January 1, 2007, electing to change its classification to a disregarded entity. Employment taxes were reported in the name and EIN of Wren’s Automotive LLC for all quarters in 2006, 2007 and 2008. Wren’s Automotive LLC was the employer and the liable taxpayer for Forms 941 for 2006. Warren Wren is the employer and the liable taxpayer for Forms 941 for 2007 and 2008.

    • Robin’s Roost LLC is wholly owned as community property by Nancy and Rudy Robin in a community property state. Employment taxes were reported in the name and EIN of Robin’s Roost LLC for all quarters in 2006 and 2007. Mr. and Mrs. Robin treat the LLC as a partnership for federal tax purposes by filing a Form 1065, U.S. Return of Partnership Income, for 2006, so the LLC is classified as a partnership for 2006. Mr. and Mrs. Robin treat the LLC as a disregarded entity for 2007 by reporting LLC activity on a Form 1040, Schedule C. For 2006 employment taxes, Robin’s Roost LLC is the employer and liable taxpayer. For 2007 employment taxes, the employer and liable taxpayer is the community of Nancy and Rudy Robin.

  2. For a single member LLC that has made no elections, the identity of the liable taxpayer will change for employment tax periods beginning on or after January 1, 2009. For example:

    • Barbara Sparrow is the sole owner of Sparrow LLC, which has made no elections. Employment taxes were reported in the name and EIN of Sparrow LLC for all quarters in 2007 and 2008. Sparrow LLC is a disregarded entity, so Barbara Sparrow is the employer and liable taxpayer for 2007 and 2008 employment taxes. For employment tax periods beginning on or after January 1, 2009, the LLC is treated as an entity separate from its owner; Sparrow LLC is the employer and the liable taxpayer.

    • Bridgette Bluebird is the single owner of Bluebird LLC , which has made no elections. She reports employment taxes in her own name and EIN for all quarters in calendar year 2007. Under modified Notice 99-6, she begins reporting employment taxes in the name and EIN of Bluebird LLC for all quarters in calendar year 2008. Since Bluebird LLC is a disregarded entity, Bridgette Bluebird is directly liable for employment taxes on wages paid prior to January 1, 2009. Even though the 2007 liability was reported in the name and EIN of Bridgette Bluebird, and the 2008 liability was reported in the name and EIN of Bluebird LLC, Bridgette Bluebird is the liable taxpayer for 2007 and 2008 employment tax periods. Bluebird LLC is the liable taxpayer for employment tax periods beginning on or after January 1, 2009.

  3. For excise tax periods beginning on or after January 1, 2008 and employment tax periods beginning on or after January 1, 2009, the LLC is the liable taxpayer, regardless of changes in election or ownership. See IRM 5.1.21.5.6

5.1.21.4  (02-19-2008)
Correcting or Clarifying Entity Information

  1. After determining the classification of the LLC, correct or clarify entity information on IDRS. Such actions may include:

    • Adding the name of a single member/owner to the assessment, if applicable

    • Correcting the filing requirements for the entity

    • Securing an Employer Identification Number (EIN) for the owner of a disregarded entity when the owner is the liable taxpayer

    • Adding the cross-reference EIN to the entity

  2. Document the ICS case history with the basis for requested corrections and clarifications.

  3. Requests to add the name and/or EIN of the owner or delete erroneously created filing requirements should be forwarded by secure email to Centralized Case Processing (CCP) using Form 2363, Master File Entity Change .

  4. Requests to close out filing requirements should be forwarded by secure email to CCP using Form 4844, Request for Terminal Action, to request TC 591, Closing Code 50 for the appropriate period.

  5. Requests to create new filing requirements must be forwarded to the Entity Unit at the appropriate campus.

5.1.21.4.1  (02-19-2008)
Addition of Owner Name to Assessment

  1. Adding the name of a single member/owner to the name line of a disregarded entity does not constitute a supplemental assessment. The legal position of the Service is that given the close relationship between the disregarded entity and its single member/owner, any reference in an assessment to the LLC is a valid assessment against the member/owner.

  2. Notices issued in the name and EIN of the LLC are legally sufficient for

    • Assessment

    • Notice and demand

    • Third Party contact notification

5.1.21.4.2  (02-19-2008)
Employer Identification Number Requirements for an LLC

  1. A multi-member LLC must have its own EIN, regardless of its classification.

  2. A single member LLC classified as an association taxable as a corporation must have its own EIN.

  3. For wages paid before January 1, 2009, an LLC classified as a disregarded entity is not required to have an EIN. The disregarded entity may request an EIN for banking purposes or if it chooses to report and pay employment taxes incurred in its business operations using the name and EIN of the LLC. See IRM 5.1.21.5.7.

  4. With respect to wages paid on or after January 1, 2009, a single member LLC that is otherwise disregarded will be treated as an entity separate from its owner and the LLC must have its own EIN. Employment taxes for periods beginning on or after January 1, 2009, must be reported and paid using the name and EIN of the LLC.

5.1.21.4.3  (02-19-2008)
Employer Identification Number Requirements for the Owner of a Disregarded Entity

  1. Treasury Regulations require every employer to have an EIN. With respect to wages paid prior to January 1, 2009, if the LLC is a disregarded entity, the member/owner, not the LLC, is the employer and must have its own EIN. This is required even if the disregarded entity is reporting and paying employment taxes in the name and EIN of the LLC.

  2. When the disregarded entity LLC is established on IDRS, the campus will assign an EIN to its owner if the LLC identifies itself as having one owner and having employees. See IRM 21.7.13.5.4.3, Why Two EINs are Assigned to a Single Member LLC, for additional explanation.

  3. When the owner is the employer, ensure that the owner has its own EIN by completing the following:

    • Research IDRS command code NAMEB AND NAMEE to determine if the member/owner of the disregarded entity has its own assigned EIN.

    • If the owner is an individual, research command code INOLES for the SSN to check for a cross-reference EIN.

  4. If no EIN has been assigned, advise the member/owner to secure an EIN through internet EIN at www.irs.gov. If the member/owner does not secure an EIN, complete the following:

    • Document the case history why an EIN is necessary.

    • Complete Form SS-4, Application for Employer Identification Number, and fax it to the appropriate campus for expedited processing per IRM 21.7.13.3.8.1., EIN Requests from Field Compliance.

    • Advise the owner of the new EIN when you receive it.

    • Request the addition of the member/owner's EIN as a cross-reference to the entity and enter it in the ICS case history for use on a levy, if required.

  5. For tax periods beginning on or after January 1, 2009, the single member/owner will not be the employer and will no longer be required to have an EIN.

5.1.21.5  (02-19-2008)
Federal Taxation of the LLC

  1. For purposes of this section, income taxation is discussed in separate sections from employment and excise taxation.

  2. Taxation of the LLC depends upon the elections made for the entity or, in the absence of election, the default classification of the entity provided in the regulations.

  3. With respect to excise tax liabilities imposed and actions first required or permitted in periods beginning on or after January 1, 2008, or employment taxes on wages paid on or after January 1, 2009, the LLC will be the liable taxpayer, regardless of its election.

5.1.21.5.1  (02-19-2008)
Income Taxation for Association Classification

  1. The LLC classified as an association taxable as a corporation, whether owned by one or more members, files Form 1120, U.S. Corporation Income Tax Return, and is liable for payment of any tax due.

  2. If the LLC further elects to be classified as a subchapter S corporation, the LLC

    • files Form 1120S, U.S. Income Tax Return for an S Corporation

    • provides Schedule K-1, Shareholder's Share of Income, Credits, Deductions, etc. to each member/owner

      Note:

      Each member/owner reports its share of the income and deductions from the LLC on its own income tax return and is liable for any tax due on that return.

    • in limited circumstances provided in the governing regulations, is liable for certain taxes due on the Form 1120S return

5.1.21.5.2  (02-19-2008)
Income Taxation for Partnership Classification

  1. The LLC classified as a partnership files Form 1065, U.S. Partnership Tax Return, and provides Schedule K-1, Partner's Share of Income, Credits, Deductions, etc., to each member/owner.

  2. Each member/owner reports its share of the income and deductions from the LLC on its own income tax return and is liable for any tax due on that return.

5.1.21.5.3  (02-19-2008)
Income Taxation for Disregarded Entity Classification

  1. When a single member LLC is classified as a disregarded entity, the owner reports the income and expenses of the LLC on the appropriate schedules of its own income tax return.

  2. If the member/owner is

    • an individual, it files Form 1040, U.S. Individual Income Tax Return, with the schedules appropriate to the income source.

    • a partnership, it files Form 1065, U.S. Return of Partnership Income.

    • a corporation, it files Form 1120, U.S. Corporation Income Tax Return,or Form 1120S, U.S. Income Tax Return for an S Corporation, if the owner is classified as an S corporation.

    • a trust, estate or another LLC, it files the appropriate income tax return for that entity type.

  3. While regulations published August 16, 2007, may affect the tax treatment of an LLC for employment and excise tax purposes, income taxation is unchanged. A single member LLC that has not elected to be treated as an association taxed as a corporation continues to report the income and expenses of the LLC on the appropriate schedules of its own income tax return.

    Note:

    An individual owner of a disregarded entity continues to be treated as self-employed for purposes of the Self-Employment Contributions Act (SECA) taxes, and not as an employee of the disregarded entity.

5.1.21.5.4  (02-19-2008)
Employment and Excise Taxation for Partnership or Association Classification

  1. When an LLC is classified as a partnership, the LLC is the employer and is liable for employment taxes.

  2. When the LLC is classified as a partnership, the liability of member/owners for employment taxes is not the same as the liability of general partners.

    • Under state law, general partners are liable for the employment tax incurred by the partnership, just as they are liable for other debts of the partnership.

    • Under state law, members/owners of an LLC are not liable for the debts of an LLC. Accordingly, the member/owners of an LLC treated as a partnership are not liable for the employment tax liability incurred by the LLC.

      Note:

      The trust fund recovery penalty (TFRP) may be asserted against a member/owner who meets the definition of a responsible person under IRC 6672.

  3. When the LLC is classified as an association taxable as a corporation or a subchapter S corporation, regardless of the number of members, the LLC is the employer and is liable for employment taxes.

  4. When the LLC is treated as a corporation, the member/owners are the equivalent of shareholders in the corporation. If the LLC owes employment taxes, the TFRP may be asserted against a member/owner who meets the definition of a responsible person under IRC 6672.

  5. Excise taxes that result from the operations of the LLC are generally the liability of the LLC and may be subject to TFRP.

  6. When the LLC is the taxpayer, the assets of the LLC, not the owners' are subject to collection action.

5.1.21.5.5  (02-19-2008)
Employment and Excise Taxation for the Disregarded Entity

  1. For employment taxes for wages paid prior to January 1, 2009, by an LLC that is a disregarded entity, the following apply:

    1. The member/owner is the employer of record for any employees engaged in the business.

    2. The member/owner is liable for all employment taxes.

    3. The assets of the member/owner are subject to collection action.

    4. Because the employment taxes are a debt of the owner, state law limitation of liability shields the assets of the LLC from administrative collection action.

    Note:

    State LLC statutes specify that an owner has no direct ownership of LLC assets. Administrative collection actions for debts of the owner cannot, therefore, be directed toward LLC assets.

  2. The single member/owner of a disregarded entity is the taxpayer for certain excise taxes that accrue prior to January 1, 2008. Due to the variety of excise taxes that may be encountered, questions regarding collection of these liabilities should be addressed on a case by case basis.

5.1.21.5.6  (02-19-2008)
Impact of Regulations Changes on Employment and Excise Taxation for a Disregarded Entity

  1. Final regulations under Treas. Reg. 301.7701-2 (as amended by T.D. 9356, 72 Fed. Reg. 45891-01), provide that a single member LLC that is disregarded as an entity separate from its owner will be treated as a separate entity for employment and certain excise tax purposes.

  2. For employment taxes, the regulations apply to wages paid on or after January 1, 2009.

  3. For excise taxes, the regulations apply to liabilities imposed and actions first required or permitted in periods beginning on or after January 1, 2008.

  4. These changes are not retroactive. Liabilities for employment and excise taxes incurred by a disregarded entity prior to the effective dates of these regulations are subject to collection procedures for disregarded entities specified in IRM 5.1.21.5.5above.

5.1.21.5.7  (02-19-2008)
Disregarded Entities and Notice 99-6

  1. Notice 99-6 allows a single member LLC classified as a disregarded entity two options for reporting and paying employment taxes for wages paid prior to January 1, 2009. They may be reported:

    • Using the name and EIN assigned to the LLC

    • Using the name and EIN assigned to the member/owner, as if there were no LLC

      Note:

      When this option is used and the member/owner is an individual, it may appear that the liability is from a sole proprietorship.

  2. For wages paid prior to January 1, 2009, the manner in which employment taxes are reported for a disregarded entity does not affect how they are collected. Whether the liability is reported using the name and EIN of the LLC or the name and EIN of the member/owner, the member/owner is the employer and is fully liable for all employment taxes incurred in the business operations of the disregarded LLC. The disregarded LLC is not the employer and has no liability for taxes due.

  3. Notice 99-6 is obsolete as of January 1, 2009, and employment tax liabilities that accrue after that date may no longer be reported in the name and EIN of the owner. The LLC is the employer for wages paid on or after January 1, 2009, and employment taxes must be reported in the name and EIN of the LLC.

5.1.21.6  (02-19-2008)
Administrative Collection Actions

  1. Determine whether the LLC or its member/owner is the liable taxpayer prior to taking any administrative collection action.

  2. Administrative collection action should never include both the name of the LLC and the name of the member/owner, as only the name of the liable taxpayer should be included.

5.1.21.6.1  (02-19-2008)
Identity of the Taxpayer for Administrative Collection Actions

  1. For income tax purposes, the name of the taxpayer identified in the assessment is used for administrative collection actions.

  2. For excise tax purposes, the name of the taxpayer identified in the assessment is used for administrative collection actions. For liabilities imposed and actions required or permitted in periods beginning on or after January 1, 2008, the LLC is the taxpayer.

  3. For employment taxes on wages paid prior to January 1, 2009, the taxpayer may be the LLC or its owner, depending on the classification of the LLC for federal tax purposes. Refer to IRM 5.1.21.3 to determine the classification of the LLC and identify the taxpayer:

    • If the LLC is classified as a partnership, the LLC itself is the taxpayer.

    • If the LLC is classified as an association taxable as a corporation, the LLC itself is the taxpayer.

    • If the LLC is classified as a disregarded entity, the single member/owner is the taxpayer.