5.1.21  Collecting from Limited Liability Companies

5.1.21.1  (09-01-2009)
Introduction

  1. This IRM section explains the characteristics of limited liability companies (LLCs), their classification options for Federal tax purposes and the corresponding implications for administrative collection actions.

  2. A limited liability company (LLC) is an 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.

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

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

  5. There is no separate "LLC" entity type for Federal tax purposes. 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 classification of the entity under applicable regulations. To properly address various collection questions, you must first understand how an LLC is classified.

    Note:

    Revised 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 accrued 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 5.1.21.7.6.1 for information about the effective dates.

  6. 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.

  7. 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.

  8. 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  (09-01-2009)
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.

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

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

  5. 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.

5.1.21.2.1  (09-01-2009)
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. The terms "member," "owner" and "member/owner" may be used interchangeably.

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  (09-01-2009)
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.

    Reminder:

    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.

    Reminder:

    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.

  5. An LLC that meets all other requirements to qualify as an S corporation and timely files a Form 2553 is treated as having made an election to be classified as an association, without having to file a Form 8832, per Treas. Reg. 301.7701–3(c)(1)(v)(C). An entity that filed an S election late, and intended to be treated as an association, may be eligible for relief pursuant to Rev. Proc. 2004–48, 2004–32 IRB 172, or Rev. Proc. 2007–62, 2007–41 IRB 786.

5.1.21.3.1.1  (09-01-2009)
Rules for Entity Classification Elections

  1. An election made on Form 8832 cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the election is filed unless the entity is eligible for late election relief under Rev. Proc. 2002–59, 2002–39 IRB 615, or by requesting a private letter ruling.

  2. Once an eligible entity makes an election on Form 8832, the entity generally cannot change that classification during the 60 months following the effective date of the election. See Form 8832 instructions for exceptions.

  3. There are numerous restrictions on which entities can elect to be taxed as an S corporation. See instructions for Form 2553.

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.

    Exception:

    See IRM 5.1.21.3.3 for special provisions regarding an LLC wholly owned as community property by a husband and wife.

    Caution:

    An LLC that is owned and operated by spouses as co-owners is a valid entity under state law. Therefore, it may not be considered a "qualified joint venture" under the provisions of the Small Business Work and Opportunity Tax Act, which allow spouses to elect not to be treated as a partnership by separately reporting a share of all of a business’s items of income, loss, etc.

  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 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  (09-01-2009)
Community Property Considerations

  1. Rev. Proc. 2002-69, 2002–45 IRB 831, 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 laws of a state, foreign country or a possession of the United States; and

    • 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.

    Note:

    The legal position of the Service is that for calendar years that the husband and wife did not file an income tax return, the wholly owned LLC is considered a multi-member LLC classified as a partnership.

  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, 1999–6 IRB 8, (regarding conversion from a disregarded entity to a partnership) and Rev. Rul. 99-6, 1999-6 IRB 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 sole 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 has two owners and is therefore a multi-member LLC.

    • Michael Cornell and Patricia Harvard own the state law partnership, M & P. The partnership owns 100% of Cornell Harvard 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 Georgetown Partnership. The partnership purchases a 25% interest in the Cornell Harvard LLC in the previous example. The LLC now has two owners, Georgetown Partnership and M & P, 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.

5.1.21.4  (09-01-2009)
Determining Classification

  1. Attempt to determine the classification of an LLC prior to initial contact to determine filing requirements for a full compliance check.

  2. For employment taxes on wages paid prior to January 1, 2009, verifying classification prior to initial contact will allow you to identify the liable taxpayer and determine the applicability of a trust fund recovery penalty investigation.

  3. For employment taxes on wages paid on or after January 1, 2009, the liable taxpayer is identified in the assessment.

5.1.21.4.1  (09-01-2009)
Internal Sources

  1. Check IDRS command code (CC) BMFOLE for the following transaction codes to determine whether or not the LLC has made an election:

    Transaction Code Meaning
    076 Indicates the
    • date the Form 8832 was accepted by the campus;

    • effective date of the election; and

    • type of entity elected.

    This code will also be input if Form 2553 is filed to make simultaneous elections.
    090 Indicates the
    • date the Form 2553 was accepted by the campus;

    • effective date of the election; and

    • fiscal year month for the entity.

  2. Transaction Code 076 will include alphabetic indicators "A" through "F," showing after PARA-CD, which correspond to the box checked on the Form 8832. The alphabetic indicator "Z" will appear if the Form 2553 is filed to make simultaneous elections.

  3. Use the following table to identify the classification elected per the PARA-CD indicator:

    Indicator Classification
    A Domestic entity; association taxable as a corporation
    B Domestic entity; partnership
    C Domestic entity; disregarded as a separate entity
    D Foreign entity; association taxable as a corporation
    E Foreign entity; partnership
    F Foreign entity, disregarded as a separate entity
    Z Domestic entity; simultaneous election, association taxable as corporation and an S corporation by filing only Form 2553

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

  5. An LLC indicator is input systemically for LLCs established on the master file on or after January 1, 2009. This indicator displays on CC BMFOLE as "LLC-IND" as follows:

    • "S" for a single member LLC

    • "M" for a multi-member LLC

    • A blank indicates entity was not identified as an LLC, or it was established prior to January 2009.

    Caution:

    An LLC is not required to notify the Service if membership changes from multi-member to single member or from single member to multi-member. If the ownership of an LLC has changed, this indicator may not identify the number of members of the LLC for each delinquent tax period. Further verification may be necessary to determine the number of owners for each tax period.

  6. Check CC TXMOD for Transaction Code 971 Action Codes 364/365/366, which may be manually input to specific tax modules to identify the liable taxpayer after a Service employee has made the determination. See IRM 5.1.21.8.3. for more information on these action codes.

  7. When the liable taxpayer cannot be determined by any of the above methods, 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 and or cross-reference TIN 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.

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

    • For entities established prior to July 2007, if the campus could not determine the number of member/owners of the LLC, a Form 1065 filing requirement was opened when the entity was 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. For a domestic LLC, the default classification and filing requirements may change concurrently with a change in ownership from multi-member to single member or from single member to multi-member. For a foreign entity, the default classification and filing requirements may change concurrently with a change in the number of members without limited liability.

5.1.21.4.2  (09-01-2009)
External Sources

  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)

    • Records from state licensing or taxing agencies

    • 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

  4. Information from state licensing or taxing agencies may include the names of members or managers.

  5. Articles of Organization or similar documents must be filed with the Secretary of State or other designated official. In some states, the Articles of Organization are known as a Certificate of Formation or Certificate of Organization. A copy of the organizing 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

  6. State statutes specify requirements for the formation of an LLC. In some states, the LLC is officially formed at the time the organizing documents are signed and delivered to the state official designated as the receiving official (Secretary of State or equivalent). Other state statutes allow for a delayed effective date (generally no more than 90 days after filing) or include additional provisions when organizing documents are filed before the LLC has at least one member. Check your state statute to determine when an LLC is officially formed.

  7. 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

      Note:

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

  8. 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.

  9. 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

    • Indication as to whether members share in management of the LLC, or if there is a designated manager

    • Name and address of one or more of the managers

    • Initial capital contributions

    • Initial shares

    • Allocation of distribution of profits amongst members (which may differ from their ownership interest)

    • Powers of the manager as signatory on bank accounts

  10. 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 for testimony, or secure an affidavit from the member(s), signed under penalty of perjury.

5.1.21.5  (09-01-2009)
Changes in Election or Ownership

  1. An LLC can elect to change its classification, but generally 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 of a domestic LLC may affect its classification 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 involving domestic entities.

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

  4. For foreign entities, the default classification may change if the number of members without limited liability changes.

  5. 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.

5.1.21.5.1  (09-01-2009)
Examples of Classification Changes by Ownership or Election

  1. For employment taxes on wages paid prior to January 1, 2009, the identity of the liable taxpayer may change under a variety of circumstances. For example:

    • Emma Eagle was the sole owner of Eagle Enterprises LLC, which made no election. On January 1, 2008, Timothy 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; Emma Eagle was the employer and liable taxpayer. When Timothy Hawk became a member on January 1, 2008, Eagle Enterprises LLC became a multi-member LLC, classified as a partnership. Eagle Enterprises LLC was the employer and the liable taxpayer for 2008 Forms 941.

    • Perry Parrot and Robert Raven owned Birdfeeders LLC, which made no election. Birdfeeders LLC was classified as a partnership, and the LLC was the employer and liable taxpayer. On January 1, 2008, Mr. Raven sold his interest in the LLC to Mr. 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 quarters of 2007 and 2008. Birdfeeders LLC was the employer and the liable taxpayer for Forms 941 for 2007 liabilities. Perry Parrot was the employer and liable taxpayer for Forms 941 for 2008.

    • Judy Goldfinch was the sole owner of Goldie’s Garage LLC, which made no election and was classified as a disregarded entity for 2006 and 2007. 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. Ms. 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 election. On January 15, 2007, 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 Mr. 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. Because the LLC is classified as an association taxable as a corporation beginning January 1, 2007, the change in ownership on October 1, 2007 did 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, and made no election. 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 treated 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 treated the LLC as a disregarded entity for 2007 by reporting LLC activity on their jointly filed 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.

    • Tom Toucan was the sole owner of Feathers LLC, which was organized July 1, 2007. Feathers LLC made no election. On January 1, 2008, Toucan sold his interest in the LLC to Chris Cardinal. Employment taxes were reported in the name and EIN of Feathers LLC for 2007 and 2008. Tom Toucan is the employer and liable taxpayer for Forms 941 for 2007 and Chris Cardinal is the employer and liable taxpayer for Forms 941 for 2008.

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

    • Barbara Sparrow is the sole owner of Sparrow LLC, which made no election. Employment taxes were reported in the name and EIN of Sparrow LLC for all quarters in 2007, 2008 and 2009. 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. Sparrow LLC continues to be disregarded as an entity separate from its owner for Federal income tax purposes.

    • Bridgette Bluebird is the sole owner of Bluebird LLC, which has made no election. She reports employment taxes in her own name and EIN for all quarters in calendar year 2007. Under Notice 99-6, as modified by T.D. 9356, 2007–39 IRB 675, she does not have to seek permission from the Commissioner to switch her method of reporting employment taxes. She begins reporting employment taxes in the name and EIN of Bluebird LLC for all quarters in calendar year 2008. Because 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. Bluebird LLC continues to be disregarded as an entity separate from its owner for Federal income tax purposes.

  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 5.1.21.7.6.1.

5.1.21.6  (09-01-2009)
Correcting or Clarifying Entity Information

  1. When you determine that the single member owner (SMO) is the liable taxpayer for any open modules, correct or clarify entity information as appropriate:

    • Add the name of the SMO to the entity in the sort name line, if not present

      Exception:

      If the sort name line contains the trade name of the LLC, add the name of the SMO to the " In care of" line of the entity.

    • Correct the filing requirements for the entity, as appropriate

    • Verify that the SMO has its own Employer Identification Number (EIN), or secure EIN for SMO if not previously assigned

    • Add the cross-reference EIN to the entity

    • Request TC 130 cross-reference, as appropriate. See IRM 5.1.12.21.1.4.1,Limited Liability Company Offset.

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

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

  4. Requests to close out filing requirements should be forwarded by secure e-mail 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.

5.1.21.6.1  (09-01-2009)
Addition of Owner Name to Assessment

  1. Adding the name of the SMO 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 SMO, 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 generally legally sufficient for

    • Assessment

    • Notice and demand

    • Third-Party contact notification

      Note:

      See IRM 5.1.21.9.1 for special requirements for a Collection Due Process (CDP) Notice. A CDP notice given to the LLC is not sufficient notice to the SMO.

5.1.21.6.2  (09-01-2009)
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 was not required to have an EIN. The disregarded entity could request an EIN for banking purposes or if it chose to report and pay employment taxes incurred in its business operations using the name and EIN of the LLC. See IRM 5.1.21.7.6.2.

  4. A single member LLC that is otherwise disregarded is treated as a corporation for employment taxes on wages paid on or after January 1, 2009 and the LLC must have its own EIN. Employment taxes on wages paid on or after January 1, 2009, must be reported and paid using the name and EIN of the LLC.

  5. A single member LLC that is otherwise disregarded is treated as a corporation for certain excise taxes that accrued on or after January 1, 2008, and the LLC must have an EIN.

5.1.21.6.3  (09-01-2009)
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 single member/owner (SMO), not the LLC, was the employer and must have its own EIN. This is required even if the SMO reported and paid employment taxes in the name and EIN of the LLC.

  2. When a disregarded entity LLC was established on the business master file, the campus assigned an EIN to the SMO if the LLC identified itself as having one owner and having employees during tax periods ended prior to January 1, 2009. See IRM 21.7.13.5.4.3 , Why Two EINs are Assigned to a Single Member LLC for Certain Tax Periods, for additional explanation.

  3. If the campus could not establish that the LLC was a disregarded entity, an EIN was assigned to the LLC, but no EIN was assigned to the SMO.

  4. When the SMO is identified as the employer for any open modules, 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 SMO is an individual, research command code INOLES for the SSN to check for a cross-reference EIN.

  5. If no EIN has been assigned, advise the SMO to secure an EIN through internet EIN at www.irs.gov. If the SMO 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., Receiving EIN Applications from Field Compliance.

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

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

  6. For tax periods beginning on or after January 1, 2009, the SMO is not the employer and is no longer required to have an EIN.

5.1.21.7  (09-01-2009)
Federal Taxation of the LLC

  1. For purposes of this section, income taxation is discussed in separate sections from employment and excise taxation. See Exhibit 5.1.21-1 for income tax rules. See Exhibit 5.1.21-2 for employment tax rules.

  2. Income 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 is treated as a corporation and is the liable taxpayer, regardless of its classification for income tax purposes.

5.1.21.7.1  (09-01-2009)
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 or Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, and is liable for payment of any tax due.

  2. When the LLC is 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

5.1.21.7.2  (09-01-2009)
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.

5.1.21.7.3  (09-01-2009)
Income Taxation for Disregarded Entity Classification

  1. When a single member LLC is classified as a disregarded entity, the single member owner (SMO) 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, the individual files Form 1040, U.S. Individual Income Tax Return, or Form 1040-NR, U.S. Nonresident Alien Income Tax Return,with the schedules appropriate to the income source.

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

    • a corporation, the SMO files Form 1120, U.S. Corporation Income Tax Return,Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, or Form 1120S, U.S. Income Tax Return for an S Corporation, if the SMO is classified as an S corporation.

    • a trust, estate or another LLC, the SMO 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 the SMO's 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.

5.1.21.7.4  (09-01-2009)
Employment and Excise Taxation for Association Classification

  1. 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.

  2. When the LLC is classified as an association taxable as a corporation, the member/owners are the equivalent of shareholders in the corporation. If the LLC owes employment taxes, 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. Excise taxes that result from the operation of the LLC are generally the liability of the LLC and may be subject to TFRP.

  4. When the LLC is the taxpayer, the assets of the LLC, not the owner(s)' assets, are subject to collection action.

5.1.21.7.5  (09-01-2009)
Employment and Excise Taxation for Partnership Classification

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

  2. A member/owner of an LLC classified as a partnership is not an employee of the LLC and may be subject to self-employment tax.

  3. 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 classified as a partnership are not directly 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.

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

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

5.1.21.7.6  (09-01-2009)
Employment and Excise Taxation for the Disregarded Entity

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

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

    2. The SMO is not an employee of the LLC, and is subject to self-employment taxes.

    3. The SMO is liable for all employment taxes.

    4. The assets of the SMO are subject to collection action.

    5. Because the employment taxes are a debt of the SMO, 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 SMO of a disregarded entity is the taxpayer for certain excise taxes that accrued 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.

5.1.21.7.6.1  (09-01-2009)
Impact of Regulations Changes on Employment and Excise Taxation for a Disregarded Entity

  1. Revised regulations under Treas. Reg. 301.7701-2 (as amended by T.D. 9356, 2007–39 IRB 675), provide that after the effective dates of the changes, a single member LLC that is otherwise disregarded as an entity separate from its owner is treated as a corporation for employment and certain excise tax purposes.

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

  3. For certain excise taxes, the regulations changes 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 above. See IRM 5.1.21.7.6.

5.1.21.7.6.2  (09-01-2009)
Disregarded Entities and Notice 99-6

  1. Notice 99-6, 1999–3 IRB 12, allowed 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:

    • Using the name and EIN assigned to the LLC; or

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

      Note:

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

  2. For employment taxes on wages paid prior to January 1, 2009, the manner in which the liability is reported for a disregarded entity does not affect how it is collected. Whether the liability was reported using the name and EIN of the LLC or the name and EIN of the SMO, the SMO 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 is not liable for any Bal Due.

  3. Notice 99-6 is obsolete as of January 1, 2009, and employment tax liabilities that accrue on or after that date may no longer be reported in the name and EIN of the SMO. 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.

5.1.21.8  (09-01-2009)
Identification of Liable Taxpayer

  1. For income tax purposes, the liable taxpayer is named in the assessment.

  2. For excise tax purposes, the liable taxpayer is named in the assessment. 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 liable taxpayer may be the LLC or its owner, depending on the classification of the LLC for federal tax purposes. See IRM 5.1.21.4. to determine the classification of the LLC and identify 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 partnership, the LLC itself is the taxpayer.

    • If the LLC is classified as a disregarded entity, the SMO is the taxpayer.

  4. For employment taxes on wages paid on or after January 1, 2009, the LLC is the taxpayer, regardless of its classification.

5.1.21.8.1  (09-01-2009)
Identity of the Taxpayer on BMFOLE

  1. For employment taxes on wages paid before January 1, 2009, the

    • LLC is the taxpayer if BMFOLE indicates that the LLC elected to be classified as an association taxable as a corporation; or

    • liable taxpayer is dependent on whether the LLC has one member or more than one member if the LLC did not elect to be classified as an association taxable as a corporation.

  2. For an entity established on or after January 1, 2009, an LLC indicator (LLC-IND) is systemically input on the master file to denote whether the LLC had one member or more than one member when it was established. The LLC indicator displays on BMFOLE. Beginning January 1, 2010, the LLC indicator will display on ICS.

  3. If the LLC indicator field on BMFOLE is blank or does not reflect the current ownership of the LLC, forward Form 4844 , Request for Terminal Action, by secure e-mail to Centralized Case Processing (CCP) to request input of CC BNCHG to update the LLC-IND as appropriate:

    • "S" for a single member LLC

    • "M" for a multi-member LLC

      Caution:

      Verify the number of members for each open module to determine the liable taxpayer for that module, as the membership of the LLC may have changed since it was established.

5.1.21.8.2  (09-01-2009)
Identity of the Taxpayer on Integrated Collection System (ICS)

  1. ICS generally reflects the entity name as it appeared when it was established on BMF. It may contain the name of the LLC, its trade name and/or the name of a member/owner.

  2. When the taxpayer is identified, document the case history with evidence supporting the classification determination. Enter "Owner is TP for pre-2009," or "LLC is TP for pre-2009" in the Misc Information section on the ICS address type "M" , IDRS mailing address screen.

  3. Create a new Name/Address record on ICS to identify the liable taxpayer. Until programming changes are made to allow the selection of the "LLC" Name/Address type in ICS, create it as an "Other" address, and select it when requesting administrative collection actions.

    • When the LLC is the taxpayer, include the name of the LLC and its trade name, if applicable, in the "Primary Name/Primary Continued" fields of the Name/Address record. Do not include the name(s) of the member/owner(s). Include the last known address of the LLC.

    • When the owner is the taxpayer, include only the name of the member/owner in the "Primary Name" field of the Name/Address record. Do not include the name of the LLC or its trade name. Include the last known address of the member/owner, even if it is different from the last known address of the LLC.

  4. If the identity of the taxpayer changes from one period to the next, create a separate Name/Address record for each taxpayer. Clarify the tax periods attributed to each taxpayer in your summarizing history entry.

  5. When the liable taxpayer changes during a tax period, the liability of both taxpayers may be reported on one tax return under the provision of Notice 99–6. Document your case history with the basis for your determination and the calculation of the portion of the module balance due from each liable taxpayer.

5.1.21.8.2.1  (09-01-2009)
LLC Case Codes in ICS

  1. Case codes have been established in ICS for LLC cases as follows:

    • 601- LLC in business

    • 602 - LLC out of business

  2. These case codes will generally not be set systemically, and must be updated through ICS when you identify a taxpayer is an LLC.

  3. Beginning January 1, 2010, ICS will set the appropriate LLC case code if the LLC indicator field displays an "S" or "M" when they case is uploaded to ICS.

5.1.21.8.3  (09-01-2009)
Identity of the Taxpayer on Integrated Data Retrieval System (IDRS)

  1. The liable taxpayer can change from one tax period to the next, or within a tax period, when the classification of the LLC changes concurrently with a change in ownership or election, or with the effective date of regulations changes. There is no systemic method to identify the liable taxpayer in these situations. It is important that the liable taxpayer be manually identified on IDRS for each tax period by the use of specific action codes. These action codes will be utilized to streamline requests for administrative collection actions and to facilitate case closing actions.

  2. Transaction Code (TC) 971 Action Codes (AC) have been assigned to identify the liable taxpayer for each tax period, as follows:

    Action Code Explanation
    364 LLC is the liable taxpayer for this tax period.
    365 Single member owner (SMO) is the liable taxpayer for this tax period.
    366 Liable taxpayer changed during this tax period.

  3. As of July 1, 2009, programming enhancements are functional to accommodate "X-REF TIN" and "Secondary Date" fields to be input with these requests. The EIN of the liable SMO, not an SSN, should be used for the "X-REF TIN." See IRM 5.1.21.6.3. for instructions to secure an EIN, if one was not previously assigned to the SMO.

  4. Use the following table to determine when the "X-REF TIN" field and the"SECONDARY DATE" field should be included for these inputs:

    Action Code X-REF TIN field Secondary Date field
    364 Not required Optional: Date LLC first liable
    365 Required: EIN of SMO Optional: Date SMO first liable
    366

    Note:

    Request a separate TC 971 AC 366 for each liable taxpayer.

    Required: EIN of liable taxpayer Required: Date SMO or LLC first liable

    Note:

    If TC 971 AC 364/365/366 was input before these new fields were functional, it is not necessary to make a subsequent request to include this information.

  5. When the liable taxpayer changes from one tax period to the next, include the date the taxpayer was first liable in the "SECONDARY DATE" field.

    Example:

    Steve Thornton was the sole member of Thornton LLC, EIN: 00-5271987, which was established on January 1, 2008. Steve Thornton's EIN is 00-6171985. Thornton LLC made no election. On July 1, 2008, Debbie Thornton acquired a partial interest in Thornton LLC. There are open Bal Due modules for Form 941 taxes for tax periods ended June 30, 2008, September 30, 2008 and December 31, 2008. Request the following:

    Tax Period Action Code X-REF TIN SECONDARY DATE
    01/200806 365 00–06171985 01/01/2008
    01/200809 01/200812 364 N/A (not required; same as case TIN) 07/01/2008

  6. When the liable taxpayer changes during a tax period, enter separate TC 971 AC 366 for each liable taxpayer during a tax period.

    Example:

    Assume in the example above that Thornton LLC has a Bal Due for the Form 940 for 2008. Request the following for Form 940 for tax period ended December 31, 2008:

    Action Code X-REF TIN SECONDARY DATE
    366 00–6171985 01/01/2008
    366 00–5271987 07/01/2008

    Example:

    Kemper LLC, EIN: 00–1241953, made no election, and had two members, Lisa Kemper and Sue Stokes. On March 1, 2008, Sue Stokes sold her interest in Kemper LLC to Lisa Kemper, EIN 00–0081853. Kemper LLC has a Bal Due for Form 941 for the tax period ended March 31, 2008. Request the following for that module:

    Action Code X-REF TIN Secondary Date
    366 00–1241953 01/01/2008
    366 00–0081853 03/01/2008

  7. This TC and AC must be manually input for each tax period when the Service determines the liable taxpayer by forwarding Form 4844, Request for Terminal Action, by secure e-mail to CCP.

  8. If TC 971 AC 364/365/366 does not correctly identify the liable taxpayer, request TC 972 with the original action code to reverse it. Request another TC 971 with the correct action code.

5.1.21.9  (09-01-2009)
Administrative Collection Actions

  1. Determine whether the LLC or the single member/owner (SMO) is the liable taxpayer for each tax period prior to taking any administrative collection actions.

  2. Administrative collection actions should not include both the name of the LLC and the name of the SMO. Only the name of the liable taxpayer should be included.

    Exception:

    Under certain circumstances, both the name of the LLC and the name of the SMO may be included on a single Form 433-D, Installment Agreement when the installment agreement is combined. See IRM 5.1.21.10.1.

  3. If the liable taxpayer changes from one tax period to the next or within a tax period due to changes in ownership or election, or as a result of the regulations changes, take separate administrative collection actions for each liable taxpayer.

  4. If the liable taxpayer changes during a tax period, manually compute the portion of the module balance attributable to each liable taxpayer. If different liable taxpayers are each responsible for a portion of the Bal Due, prepare separate documents for each liable taxpayer. Manually update the outstanding balance for each liable taxpayer on administrative collection actions using the ICS templates. The same tax period may appear on separate administrative collection actions against the LLC and the SMO. Include the portion of the Bal Due attributable to each taxpayer on the appropriate administrative collection action.

  5. See Exhibit 5.1.21-3 to determine which name, address and taxpayer identification number(s) to include on administrative collection actions.

5.1.21.9.1  (09-01-2009)
Collection Due Process Notice

  1. Identify the taxpayer prior to issuing the Letter 1058, Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing, so the correct entity is notified of their right to a Collection Due Process (CDP) hearing. Document your history with the basis for your determination of the liable taxpayer.

    • When the LLC is the taxpayer, the CDP notice is issued in the name of the LLC and the LLC has the right to a CDP hearing.

    • When the single member owner (SMO) is the taxpayer, the CDP notice must be issued in the name of the SMO and the SMO has the right to a CDP hearing.

  2. If the Notice of intent to levy and Notice of a right to a CDP hearing was issued by ACS, ensure it included the name of the liable taxpayer and was given at the proper address.

  3. When the SMO is the liable taxpayer, notice to the SMO is required even when the CDP notice was previously issued in the name of the disregarded LLC. To be valid, the notice must include the name of the SMO and be given at the last known address of the SMO, if different from the address of the LLC. The CDP notice is an exception to the Service's position that notice to the disregarded LLC is equivalent to notice to the owner when the owner of the LLC is the taxpayer.

  4. When the SMO is the liable taxpayer and the CDP notice includes both the name of the LLC and the name of the SMO (even when the SMO is listed on the second name line), the fact that such notice also includes the LLC’s name will not invalidate it. However, the notice must be given at the proper address for the SMO according to IRC 6320(a)(2) and IRC 6330(a)(2).

  5. A Notice of intent to levy and Notice of a right to a CDP hearing must be issued to the taxpayer prior to levy. Generate Letter 1058 through ICS, selecting the correct Name/Address record created for the SMO. See IRM 5.1.21.8.2. Include the EIN of the assessment so proper transaction codes are generated.

  6. If the original CDP notice was not properly issued to the liable taxpayer, request input of a TC 972 AC 069 to reverse the original notice. Request a new CDP notice through ICS, selecting the correct Name/Address record created according to IRM 5.1.21.8.2. Document ICS history to explain this action.

  7. If the identity of the taxpayer changes due to a change in classification or regulations, issue one CDP notice to the LLC for the tax period(s) when the LLC is liable and a separate CDP notice to the SMO for the tax period(s) when the SMO is liable. If the liable taxpayer changed during a tax period, the same tax period would appear on each CDP notice, with the appropriately allocated amounts of liability for each entity.

  8. Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320, is issued post lien filing to the taxpayer to notify the taxpayer of their right to a CDP hearing. It is systemically generated to the name and address listed on the Notice of Federal Tax Lien (NFTL), using the EIN of the assessment. Selecting the correct Name/Address record when requesting the NFTL will ensure proper issuance of the notice and protection of the taxpayer's rights of appeal concerning the filing of the lien.

5.1.21.9.2  (09-01-2009)
Notice of Federal Tax Lien

  1. The taxpayer must be properly identified on the NFTL to give proper public notice of the debt.

  2. The Automated Lien System (ALS) is interfaced with the master file to facilitate timely systemic release of NFTLs when the tax liability has been satisfied. Because ALS requires a TIN for this process, the NFTL always contains the EIN of the assessment, even if it does not match the name of the taxpayer.

  3. Request the NFTL through ICS by selecting the correct Name/Address record and the appropriate tax periods for each liable taxpayer.

  4. When the LLC is the liable taxpayer, do not select the "Corporation" or "Partnership" entity type options on the ICS menu, even when the LLC is classified as a corporation or partnership, as this causes the literal, "a corporation," or "a partnership" to be printed following the LLC name on the NFTL. Until programming changes are made to allow the selection of the "LLC" entity type in ICS, select the "Proprietorship" entity type on the ICS menu, to prevent the incorrect entity type from printing on the NFTL.

    Example:

    Eagle Enterprises LLC is a multi-member LLC classified as a partnership, with employment taxes outstanding for the quarter ended March 31, 2008. Since the LLC is the taxpayer, select the "Proprietorship" entity type when requesting the NFTL through ICS (until future programming allows the "LLC" entity type) so the name line on the NFTL will read, "Eagle Enterprises LLC."

  5. Beginning January 1, 2010, enhancements to ICS will allow the selection of the "LLC" entity type when requesting the NFTL through ICS. When the LLC is the liable taxpayer, select the "LLC" entity type.

  6. When the LLC is the taxpayer and the NFTL is requested through ALS instead of ICS, select the "LLC" entity type.

    Example:

    Eagle Enterprises LLC is a multi-member LLC classified as a partnership, with employment taxes outstanding for the quarter ended March 31, 2008. Since the LLC is the taxpayer, select the "LLC" entity type when requesting the NFTL through ALS so the name line on the NFTL will read, "Eagle Enterprises LLC, a limited liability company."

  7. When the single member owner (SMO) is the taxpayer, select the entity type of the SMO when requesting the NFTL through ICS or through ALS. Do not select the "LLC" entity type.

    Example:

    Tom Toucan is the SMO of Feathers LLC, a disregarded entity with employment taxes outstanding for the quarter ended September 30, 2008. Since the SMO is an individual, select the "Proprietorship" entity type when requesting the NFTL so the name line on the NFTL will read, "Tom Toucan."

    Example:

    Manchester, Inc. is the SMO of Freeman LLC, a disregarded entity with employment taxes outstanding for the quarter ended December 31, 2008. Since the SMO is a corporation, select the "Corporation " entity type when requesting the NFTL so the name line on the NFTL will read, "Manchester, Inc., a corporation."

  8. If the identity of the taxpayer changed from one period to the next resulting in a change of the taxpayer of record, separate NFTLs must be filed for each liable taxpayer.

  9. If the identity of the taxpayer changed during a tax period, calculate the portion of liability attributable to each liable taxpayer.

    • There may be two separate NFTLs with different names but the same EIN and tax period with the appropriately allocated amounts of the liability. NFTLs for tax periods where the liable taxpayer changed during a tax period cannot be requested through ICS.

    • To request NFTLs when the identity of the taxpayer changed during a tax period, complete Form 12636, Request for Filing or Refiling of Federal Tax Lien, and send it by secure e-mail to the appropriate team in the Centralized Lien Unit (CLU) for input.

  10. For more information on filing of the NFTL in these cases, see IRM 5.12.2.6.3, Limited Liability Company (LLC).

5.1.21.9.2.1  (09-01-2009)
Location for Filing NFTL

  1. State law determines where the NFTL should be filed to compete against other lien interests. Refer to IRM Exhibit 5.12.2–4 or your state statute for filing locations for various entity types. For U.S. Possessions and Territories (also known as insular areas), NFTL filing locations are determined by local law.

  2. The NFTL should be filed in the location specified for partnerships and corporations when

    • the SMO is the taxpayer, and the SMO is a partnership or a corporation; or

    • the LLC is the taxpayer, classified as a partnership or a corporation

    • the otherwise disregarded LLC is treated as a corporation for excise tax periods beginning on or after January 1, 2008, and for employment tax periods beginning on or after January 1, 2009.

  3. The NFTL should be filed in the location specified for individuals when the liable SMO is an individual.

5.1.21.9.2.2  (09-01-2009)
Incorrect Taxpayer Name on NFTL

  1. When a NFTL has been filed using only the name of an entity that is not the liable taxpayer, request a withdrawal of the NFTL through AIQ, Advisory. Do not request a release, as that action would extinguish the underlying statutory lien. File a new NFTL with the name of the taxpayer and the EIN of the assessment. The new NFTL does not retain the priority of the original NFTL.

    Exception:

    Depending on the facts of each case, however, a NFTL identifying the disregarded LLC as the taxpayer may be a valid notice against the SMO. The Government's position is that a NFTL need not precisely identify the taxpayer; rather, the NFTL is valid if it substantially complies with the filing requirement so that constructive notice is provided to third parties. Because the Service will lose its priority by withdrawing the NFTL, consult Area Counsel in certain cases in which the name of the LLC is very close to the name of the SMO. Counsel will make a determination based on the particular facts.

  2. If the NFTL includes the names of both the LLC and the SMO, and was not filed in the correct location for the liable taxpayer, follow the procedures in (1) above.

  3. When the NFTL includes the names of both the LLC and the SMO, and was filed in the correct location for the liable taxpayer, request an amended NFTL, deleting the name of the entity that was not liable. This will preserve the priority of the original NFTL as to the liable taxpayer. If you do not have access to the amend function of ALS, request the amended NFTL by e-mailing Form 13809, Request for Amendment to a Recorded Notice of Federal Tax Lien, by secure e-mail to the appropriate team in CLU for input.

5.1.21.9.3  (09-01-2009)
Notice of Levy

  1. The notice of levy must properly identify the taxpayer so that the third party who receives it can identify which assets to attach.

    • When the LLC is the taxpayer, include the name, trade name (if applicable), and the EIN of the LLC on the notice of levy. Do not include the name(s) or TIN(s) of the owner(s).

    • When the single member owner (SMO) is the taxpayer, include only the name and TIN(s) of the SMO on the notice of levy.

      Note:

      The TIN is frequently used by third parties for account identification purposes, so no TIN other than that of the liable party should appear in the "identifying number(s)" field on the levy, despite the resulting mismatch between the assessment and the notice of levy. See IRM 5.1.21.9.3.1.

  2. The levy will attach only to the assets of the taxpayer identified.

  3. Generate the notice of levy through ICS so a third-party contact is recorded, a history entry of the levy is made and a systemic follow-up is generated for the levy.

  4. When the identity of the taxpayer has changed, issue separate notices of levy for each taxpayer. Prepare notices through ICS, selecting the appropriate Name/Address record and tax periods for each levy. Use the edit features of Microsoft Word to make any necessary corrections prior to printing the notices.

5.1.21.9.3.1  (09-01-2009)
Preparation of Notice of Levy when the Single Member Owner (SMO) is Taxpayer

  1. When the SMO is the taxpayer and the liabilities are assessed in the name and EIN of the SMO, generate the notice of levy through ICS, selecting the appropriate Name/Address record and tax periods.

  2. When the SMO is the taxpayer for liabilities assessed in the name and EIN of the LLC, special care is needed when preparing a notice of levy. Generate the notice of levy through ICS, selecting the appropriate Name/Address record and tax periods. Use the edit features of Microsoft Word to make any corrections, as noted below.

  3. Include the EIN of the liable SMO on the notice of levy. The levy may also include the Social Security Number, if the SMO is an individual.

  4. To avoid accounts being incorrectly attached and to facilitate the posting of levy proceeds received, a disclaimer may be added to the notice of levy: "This notice attaches to all accounts in the name of SMO name, EIN and SSN, if applicable) as owner of ( LLC name and EIN) but does not attach accounts established in the name of (LLC name and EIN)."

5.1.21.9.3.2  (09-01-2009)
Levy on LLC for Flow-Through Income of a Member

  1. When a member of an LLC is liable for federal taxes, a Notice of Levy may be served on the LLC to attach distributions payable to the member when the right to receive income from the LLC is "property" or a "right to property" under state law. Under most state laws, a member of an LLC has a right to receive a share of the LLC's profits and losses, unless otherwise provided in the LLC's operating agreement. Consult with Area Counsel, if necessary, to determine the member's property rights under state law.

  2. A levy will attach property possessed and obligations existing at the time of the levy. Obligations exist when the liability of the obligor is fixed and determinable, although the right to receive payment may be deferred until a later date. Courts have held that the "fixed and determinable" requirement in Treas. Reg. 301.6331-1(a)(1) is satisfied when the events which give rise to the obligation have occurred and the amount of the obligation is capable of being determined in the future. Under this rationale, a levy could be served upon the LLC to attach income to which the member is entitled for services rendered prior to the service of the notice of levy, after the LLC sets aside a reserve for overhead expenses.

  3. Generally, a levy extends only to property possessed and obligations which exist at the time of levy. An exception to this rule, IRC 6331(e), authorizes a continuing levy on salary or wages, but does not specify the types of remuneration that are covered by the terms "salary or wages."

  4. Courts have held that, under certain circumstances, recurring payments that are made as draws or advances on future income may be subject to the continuing wage levy provision of IRC 6331(e). Consider using the Service's summons authority to determine the frequency with which the owner takes draws of profits from the LLC.

  5. Consult with Area Counsel to determine whether the facts are sufficient to support a continuing wage levy, using Form 668-W, Notice of Levy on Wages, Salary and Other Income, or if successive levies, using Form 668-A, Notice of Levy, should be served to attach to the property of or obligations owed to the owner at the time of levy.

5.1.21.9.4  (09-01-2009)
Preparation of Seizure Documents

  1. The Form 668-B, Levy, Form 2433, Notice of Seizure, and other seizure documents must include the name of the entity identified as the taxpayer. When preparing these documents, select the Name/Address record that contains only the name of the liable taxpayer. Do not include the name of the entity that is not the taxpayer.

  2. Use the assessment TIN for the preparation of seizure documents, even if it does not match the name of the taxpayer. The TIN is considered a convenience for internal record keeping. Use of the assessment TIN will ensure proper posting of payments received.

  3. When LLC assets are seized, include only those tax periods where the LLC is identified as the liable taxpayer.

  4. When the single member owner's (SMO's) assets are seized, include only those tax periods where the SMO is identified as the liable taxpayer.

5.1.21.9.5  (09-01-2009)
Trust Fund Recovery Penalty

  1. Identify the liable taxpayer to determine the applicability of a Trust Fund Recovery Penalty (TFRP) investigation. See IRM 5.7, Trust Fund Compliance.

    Reminder:

    Consider TFRP for all LLCs for employment taxes on wages paid on or after January 1, 2009.

  2. When the SMO is the taxpayer, TFRP is not required to establish liability against the SMO. However, TFRP may be applicable against other persons who meet the definition of a responsible person under IRC 6672. Possibilities include:

    • A designated employee/manager

    • Other employees within the disregarded entity

    • An employee or official within the owner organization (such as a corporation, partnership, trust, or other LLC) with responsibility for employment tax matters of the disregarded entity

    Reminder:

    If there are employment tax liabilities on wages paid both before and after January 1, 2009, the SMO of a disregarded entity is directly liable for the tax periods ended prior to January 1, 2009. The LLC is liable for employment taxes on wages paid on or after January 1, 2009 and a TFRP determination is required.

  3. When the LLC is the taxpayer, a member/owner is protected from direct liability for the debts of the LLC. The TFRP may be applicable to collect from individuals who meet the definition of a responsible person under IRC 6672. Possibilities include:

    • Member/owner(s)

    • Manager designated in the operating agreement

    • Other employees determined liable

  4. The TFRP on excise taxes is limited to the types of collected excise taxes specified in IRM 5.7.3.1.1, TFRP for Collected Excise Taxes. Personal liability for other collected excise taxes under IRC 4103 may be asserted when facts and circumstances warrant.

  5. When the SMO is the taxpayer for some tax periods and the LLC is the taxpayer for other periods, contact the Area Automated Trust Fund Recovery (ATFR) Coordinator to create two separate cases on ATFR.

  6. When there are separate cases on ATFR, separate actions may be taken as follows:

    If the. . . And there are . . . Then . . .
    LLC is liable any individuals subject to the TFRP complete TFRP using normal processing
    SMO is liable other individuals subject to the TFRP complete TFRP using normal processing for assessment against responsible parties
    SMO is liable no other individuals subject to the TFRP close the case on ATFR using the "Closed - LLC" disposition

5.1.21.9.6  (09-01-2009)
IRC 6020(b) Actions

  1. IRC 6020(b) authorizes the Secretary to make and file a tax return on behalf of a taxpayer who or which fails to do so under any internal revenue law or regulation. Prior to proposing an IRC 6020(b) action, identify whether the LLC or the single member owner (SMO) is the taxpayer.

  2. When the SMO is the taxpayer, an IRC 6020(b) action for employment taxes is proposed in the name and EIN of the SMO without regard to alternate filing options allowed under Notice 99-6 to account for, report, and pay employment taxes in the name of the disregarded entity.

    Caution:

    If there is an existing assessment for the same tax period in the name and EIN of the SMO for liability resulting from a separate business operated by the owner, ensure that an additional assessment is not prohibited by an ASED. Consult with Area Counsel, if necessary.

  3. When the LLC is the taxpayer, an IRC 6020(b) action for employment taxes is proposed in the name and EIN of the LLC.

    Note:

    For employment taxes for wages paid on or after January 1, 2009, the LLC is the taxpayer. Accordingly, an IRC 6020(b) action for such employment taxes will be proposed in the name and EIN of the LLC, even if the LLC is disregarded for income tax purposes.

  4. If a SMO of a disregarded LLC has unfiled employment tax returns for periods both before and after January 1, 2009, ensure that IRC 6020(b) action is proposed against the correct entity:

    • Because the SMO is the taxpayer for wages paid prior to January 1, 2009, the IRC 6020(b) action for tax periods ended prior to January 1, 2009 would be proposed in the name and EIN of the SMO.

    • Because the LLC is the taxpayer for wages paid on or after January 1, 2009, the IRC 6020(b) action for tax periods beginning on or after January 1, 2009 would be proposed in the name and EIN of the LLC.

      Note:

      Similarly, for employment taxes that accrue before January 1, 2009, ensure that the IRC 6020(b) action is proposed against the correct entity if the identity of the taxpayer changed with an elective change or a change in ownership of the LLC.

5.1.21.9.7  (09-01-2009)
Summons Procedures

  1. The taxpayer under investigation must be properly identified by name on a summons issued for the liability resulting from the operation of an LLC:

    • When the LLC is the taxpayer, include the name of the LLC in the "statement of liability" section of the summons. The name of the member/owner(s) should not be included even though the individual may be the summoned party.

    • When the single member owner (SMO) is the taxpayer, include the owner’s name, not the name of the LLC, in the "statement of liability" section of the summons.

    • If a summons is being issued to establish the Trust Fund Recovery Penalty (TFRP) against an individual, use the procedure for issuing a summons to establish the TFRP against an officer or other individual in a corporation. See IRM 25.5.6.4.1, Procedures for Summonses Issued to Investigate Liabilities for the Trust Fund Recover Penalty.

      Example:

      John Whatcom as member/owner of Whatcom Electric LLC

    • Include the full name, title and address of the summoned party in the description of the summoned party, on the "To" and "At" lines of the appropriate summons form, even if it duplicates the name in the "statement of liability" section. Include the title or official status of the summoned party on the "To" line of the appropriate summons form.

      Example:

      Margie King as managing member of King’s Corners LLC

    • Because a member/owner of an LLC may be an individual, corporation, partnership, trust or another LLC, the summoned party may be an employee or owner of the LLC itself, or an employee of an entity that owns the LLC.

      Example:

      Margie King as controller of Kings, Inc., member/owner of King’s Corners LLC

    • The information summoned should be clearly described. If summoning the bank records for the LLC, describe the summoned materials with the LLC's name. If summoning the owner’s bank records, describe the summoned materials with the owner’s name.

    • Notice to any person identified in the summons is required for certain third-party summonses, including a summons served on a third-party witness for the production of records or testimony relating to the liability resulting from the operation of an LLC. When "notice " is required, the taxpayer is always a noticee, even though the taxpayer’s name may not appear in the description of the summoned records. Both the LLC and the member/owner(s) may be entitled to a notice, depending on the description of summoned records.

    Note:

    Refer to IRM 25.5, Summons Handbook, for additional information regarding issuance of a summons and to IRM 5.17.6.6(2), Third-Party Summonses Subject to IRC 7609, and IRM 5.17.6.6.2, Notice and Waiting Period Requirements, for a discussion of the exceptions to third-party notice and waiting requirements in connection with a summons issued in the aid of the collection of an assessment made or judgment rendered against the person with respect to whose liability the summons is issued.

  2. If the identity of the taxpayer changed during the period of time for which records are summoned, issue a separate summons for each taxpayer. This may occur if you are conducting a TFRP investigation for some periods when the SMO was the taxpayer and other periods when the LLC was the taxpayer.

5.1.21.10  (09-01-2009)
Case Resolution Actions

  1. The liable taxpayer must be identified prior to case resolution actions. If there are different liable taxpayers identified for separate tax periods, separate case resolution actions may be required.

5.1.21.10.1  (09-01-2009)
Installment Agreements

  1. The identity of the taxpayer determines the party subject to an installment agreement. Ensure that a Name/Address record, identifying only the liable taxpayer, is created on ICS when securing installment agreements where only the single member owner (SMO) or the LLC is the liable taxpayer for all open tax periods.

    Note:

    See paragraphs (5) thru (7) below for situations where the SMO is liable for some tax periods and the LLC is liable for others.

  2. Voluntary payments may be accepted from the LLC, regardless of the identity of the taxpayer. Payments are applied to the entity identified in the assessment.

  3. When only the LLC is the taxpayer, the installment agreement is with the LLC.

    • The installment agreement is based on the LLC's ability to pay.

    • Any default notifications and actions are directed against the LLC and LLC assets.

  4. When only the SMO is the taxpayer, the installment agreement is with the SMO, even when the tax liabilities are assessed in the name and EIN of the LLC.

    • The installment agreement will include the EIN of the assessment to facilitate input of proper codes, posting of payments and monitoring of the agreement.

    • The following statement may be included on an installment agreement when the member/owner is liable for the employment taxes: " This agreement is between the Service and (SMO name). Payments will be accepted from (SMO name) or (LLC name), and will be applied to the liability assessed against (LLC name and EIN). In the event of default, enforcement action will be taken against (SMO name)."

    • Any default notifications and actions are directed against the SMO and SMO assets.

    • Special care must be taken in the monitoring process to ensure levy action is not taken against assets of the LLC, in the event of default.

    Reminder:

    This paragraph applies only to employment taxes on wages paid before January 1, 2009. The LLC is the taxpayer for employment taxes on wages paid on or after January 1, 2009.

  5. If the identity of the taxpayer changed from one period to the next resulting in a change of the taxpayer of record, determine whether an installment agreement is the appropriate resolution for each liable taxpayer.

  6. If an installment agreement is the appropriate case resolution for only one liable taxpayer, complete the action for the other liable taxpayer before submitting the installment agreement for processing.

  7. If an installment agreement is the appropriate case resolution for both the SMO and the LLC, a combined installment agreement may be secured. Refer to Memorandum SBSE-05–0509–020, Interim Guidance on Processing of In-Business Trust Fund Installment Agreements for Disregarded Limited Liability Company Entities, to be incorporated into IRM 5.14.7, BMF Installment Agreements, for additional procedures relating to these installment agreements.

    Note:

    The names of both the LLC and the SMO will appear on a combined installment agreement . This is an exception to the general rule that collection actions should not include both the name of the LLC and the name of the SMO.

5.1.21.10.2  (09-01-2009)
Offers In Compromise

  1. The taxpayer must be properly identified in an Offer in Compromise (OIC) submitted for the liability resulting from the operation of an LLC.

  2. If the LLC is the taxpayer,

    • the OIC should reflect the LLC name as the taxpayer's name in Section I of Form 656, Offer in Compromise, with the signature, name and title of any individual authorized to sign for the LLC in Section VIII.

    • A Form 433-B for the LLC is required.

  3. If the single member/owner (SMO) is the taxpayer,

    • the OIC should reflect the SMO's name as the taxpayer's name in Section I of the Form 656;

    • the signature in Section VIII should be that of the individual owner or an official authorized to sign on behalf of a corporate, partnership, trust or LLC owner.

    • a Form 433-A or Form 433-B for the owner of the LLC, and a Form 433-B for the LLC, if it is still operating, is required.

  4. When the SMO is the taxpayer, the following factors must be considered to determine the adequacy of the offer:

    • The assets of the LLC are not owned directly by the owner as offer proponent.

    • The owner/proponent's assets include the ownership interest in the disregarded LLC.

    • As a general rule, the owner's interest is the right to a distribution of money or property from the LLC and is governed by state statutes. For example, most states require the satisfaction of unsecured creditors of the LLC before a distribution can be made to the owner. Such limitations will have an effect upon the value assigned the owner's interest.

    • If the LLC is no longer operating, the SMO must provide information on the disposition of LLC assets.

  5. An OIC submitted for trust fund taxes arising from the operation of the LLC has the same requirements as for other in-business taxpayers. See IRM 5.8.4.13.1, Offers From Operating Businesses, and IRM 5.8.4.13.2 , Trust Fund Liabilities, regarding trust fund liabilities.

  6. When the LLC is the taxpayer for some tax periods and the SMO is the taxpayer for other tax periods assessed under the same EIN, separate actions are required for each liable taxpayer. If an Offer in Compromise is the appropriate case resolution for both liable taxpayers, secure a separate OIC from each liable taxpayer. An accepted OIC for one liable taxpayer will not be defaulted by subsequent liabilities owed by a different liable taxpayer assessed under the same EIN.

5.1.21.10.3  (09-01-2009)
Currently Not Collectible

  1. Identify the taxpayer prior to reporting accounts currently not collectible (CNC). The collectibility determination must be made based on the assets and payment abilities of the liable taxpayer.

  2. Use the EIN of the assessment to report accounts currently not collectible.

  3. Request TC 130 for refund offset as appropriate when the single member owner (SMO) is liable for an assessment made in the name and EIN of the LLC.

  4. If the identity of the taxpayer changed from one period to the next resulting in a change of the taxpayer of record, separate collectibility determinations are required for each taxpayer.

  5. When closing modules on one or both liable taxpayers (LLC and SMO) as currently not collectible, case resolution actions must be taken in a specific order. For additional information on these situations, see IRM 5.16.1.3.4, Limited Liability Companies.

5.1.21.11  (09-01-2009)
Bankruptcy Proceedings

  1. When the Service receives notice that an LLC has filed bankruptcy, Insolvency must determine if the LLC or its single member/owner (SMO) is the taxpayer before proceeding with a proof of claim.

    • If the bankrupt LLC is the taxpayer, normal proof of claim procedures are used. Liability for TFRP can be pursued against responsible persons, without regard for the automatic stay imposed by the bankruptcy.

    • If the SMO is the taxpayer, the LLC has no liability for Bal Due modules, even though assessments may exist in the LLC name resulting from the SMO using the option of reporting employment taxes under the LLC name and EIN. The liability is that of the owner and the Service may not have the status of a creditor of the bankrupt entity. The automatic stay imposed by the bankruptcy does not bar collection against the SMO for the entire employment, excise or income tax liability arising from the operation of the LLC.

      Caution:

      For situations where the SMO has also filed for bankruptcy, follow the procedures in (2) below.

    Note:

    For employment taxes for wages paid on or after January 1, 2009, or excise taxes incurred on or after January 1, 2008, the LLC is the taxpayer.

  2. When the SMO files bankruptcy, Insolvency may not be aware of a liability arising from the activities of the disregarded LLC because of the limitations of IDRS and CFOL. When Insolvency has indications that the debtor is the SMO of an LLC, determine whether the SMO is the liable taxpayer for employment tax liabilities on wages paid prior to January 1, 2009 by:

    • checking CC TXMOD to determine whether TC 971 AC 364/365/366 has been input to identify the liable taxpayer;

    • reviewing the ICS Name/Address records, and/or case history to determine whether a revenue officer has identified the liable taxpayer;

    • examining the schedules of the debtor for evidence of ownership of a disregarded LLC;

    • questioning the taxpayer and/or the power of attorney at the 341 hearing;

    • issuing a courtesy investigation to a revenue officer field group to make the determination; or

    • contacting Area Counsel to obtain the information from the debtor through a Bankruptcy Rule 2004 examination.

  3. Employees who learn of a bankruptcy proceeding where an LLC or owner of a disregarded LLC is the debtor should notify Insolvency of the tax status of the debtor.

    • If the LLC is the debtor, notify Insolvency of any tax liability owed by the LLC.

    • If the SMO is the debtor, notify Insolvency of any tax liability owed by the member/owner.

  4. If LEM criteria are met, a proof of claim will be filed for the tax liability of

    • an LLC classified as a partnership or an association taxable as a corporation when the LLC files bankruptcy,

    • the single member/owner of a disregarded entity when the SMO files bankruptcy

    • an LLC treated as an entity separate from its owner for employment taxes on wages paid on or after January 1, 2009, or excise taxes incurred on or after January 1, 2008, when the LLC files bankruptcy.

  5. A protective proof of claim should be filed if the liable taxpayer cannot be determined prior to the bar date or under certain other conditions described in IRM 5.9.13.14, Limited Liability Companies.

5.1.21.12  (09-01-2009)
Other Collection Remedies

  1. Other collection remedies may be available to collect from LLCs. These include:

    • Alter Ego

    • Nominee Liability

    • Transferee Liability

  2. For assistance, refer to IRM Section 5.17.14, Legal Reference Guide for Revenue Officers, Fraudulent Transfers and Transferee and Other Third Party Liability.

  3. Because these options are highly dependent upon case fact patterns, they should be pursued only with the agreement and guidance of Area Counsel.

5.1.21.12.1  (09-01-2009)
Charging the Member's Interest

  1. When an owner is subject to a federal tax lien, the ownership interest in the LLC is, in theory, subject to lien attachment. Administrative action may not be fruitful for the following reasons:

    • The value of the interest to a prospective purchaser is usually the right to receive a distribution of money or property from the LLC. The prospective purchaser does not acquire a direct ownership interest in the LLC's assets.

    • State law generally requires payment of creditors' claims, both recorded liens and general unsecured claims, before a distribution may be declared to the owner(s).

    • These factors combine to make the value of the ownership interest difficult to determine and of very limited value to prospective purchasers.

  2. Furthermore, most state laws protect the LLC from forced distributions to member/owner(s).

  3. However, a two step process may be used to charge the member's interest. This process may be useful when the single member/owner is liable for taxes incurred in the operation of a disregarded LLC.

    1. A suit to reduce a tax claim to judgment and to foreclose the federal tax lien establishes a judgment against the owner.

    2. The judgment is then used as the basis for action in state court to charge the member's interest and obtain an order for distribution of money or property to satisfy the judgment.

    3. The United States steps into the shoes of the member/owner and is paid any distributions made from the LLC pursuant to the order.

      Note:

      As pending actions do not preclude distributions from the LLC prior to the order of the court, the LLC could be reduced to an empty shell by other distributions during the pendency of suit. In appropriate cases, pre-judgment relief to prevent such distributions may be sought as a part of the suit.

Exhibit 5.1.21-1  (09-01-2009)
Income Taxation for LLCs

Use the following table to determine how a limited liability company will be treated for federal income tax purposes:

Classification A
Partnership
B
Corporation
C
Disregarded Entity
Domestic Entities Multi-member
No election filed (default provision) or filed Form 8832 electing box [b] to be classified as a partnership
Single or Multi-member
Filed Form 8832 electing box [a] to be classified as an association taxable as a corporation or Per Se corporation per Form 8832 instructions
Single member
No election filed (default provision) or filed Form 8832 electing box [c] to be disregarded as a separate entity
Foreign Entities Multi-member
At least one member does not have limited liability (default provision) or filed Form 8832 electing box [e] to be classified as a partnership
Single or Multi-member
All members have limited liability (default provision) or at least one member does not have limited liability and filed Form 8832 electing box [d] to be classified as an association taxable as a corporation
Single member
Member does not have limited liability (default provision) or filed Form 8832 electing box [f] to be disregarded as a separate entity
Filing Requirement Reported on Form 1065 in name and EIN of LLC, with K-1 to each member Reported on Form 1120 or 1120-F, in name and EIN of LLC, [unless entity files Form 2553 electing to be an S Corporation, then Form 1120S, with K-1 to each member] Reported on the income tax return of the single member, with its TIN [1040/1040-NR if individual member, 1065 if partnership member, 1120 or 1120–F if corporate member]
Collectible From Each member’s assets, not from the assets of the LLC LLC assets, not the assets of the member [unless LLC filed Form 1120S, then from each member, not the assets of the LLC] Single member, from its own assets, not the assets of the LLC

For domestic entities, a change in the number of members of an entity classified as association taxable as a corporation (column B) does not affect its classification. However, a domestic entity classified as a partnership, (A), will be converted to a disregarded entity, (C), when its membership is reduced to one member; and a disregarded domestic entity, (C), will be converted to a partnership, (A), when it adds any more members. See Rev. Rul. 99–5, 1999–6 IRB 8 and Rev. Rul. 99–6, 1999-6 IRB 6, for income tax ramifications of these conversions. For foreign entities, the default classification may change if the number of members without limited liability changes.

Exhibit 5.1.21-2  (09-01-2009)
Employment Taxation for LLCs

Use the following table to determine how a limited liability company will be treated for federal employment tax purposes:

Classification of LLC Partnership OR Corporation Disregarded Entity Disregarded Entity for income tax; corporation for employment tax
Tax Periods ALL Ended before January 1, 2009 Beginning on or after January 1, 2009
Filing Requirement Reported in the name and EIN of the LLC Reported in the name and EIN of the single member owner or in the name and EIN of the LLC Reported in the name and EIN of the LLC
TC 971 Action Codes AC 364 for modules where LLC is liable AC 365 for modules where SMO is liable AC 364 for modules where LLC is liable
Request a separate AC 366 for the LLC and the SMO when they are each liable for different portions of the same module. Include the EIN of the liable taxpayer in the X-REF TIN field and the date they were first liable in the SECONDARY DATE field.
Collectible From LLC, not the assets of the member ;

TFRP applicable to collect the trust fund portion of the tax from responsible, willful persons which may or may not include members
SMO entire employment tax liability from member’s assets ONLY, not the assets of LLC;

TFRP applicable against responsible, willful bookkeepers or managers
There are various avenues to pursue to reach LLC assets for the liabilities of a disregarded entity, including Alter Ego, Nominee liability, Transferee liability, or two step judgments, depending on state law and the facts of the case. Consult with Area Counsel.
LLC, not the assets of the member;

TFRP applicable to collect the trust fund portion of the tax from responsible, willful persons which may or may not include members
TFRP Determination Required Required for responsible, willful bookkeepers, managers or other persons; not for SMO Required

Exhibit 5.1.21-3  (09-01-2009)
Identification of Taxpayer on Administrative Collection Actions for Employment Taxes

Use the following table to determine the taxpayer name, address and taxpayer identification number(s) to be used on administrative collection actions for employment taxes assessed in the name and EIN of an LLC.

Reminder:

Include the name, address and taxpayer identification number of the assessment on administrative collection actions for income tax and excise tax liabilities. Notice 99-6 applies only to employment taxes on wages paid before January 1, 2009.

Classification of LLC Partnership OR Association Taxable as a Corporation Disregarded Entity Disregarded Entity for income tax; corporation for employment tax
Tax Periods ALL Ended before January 1, 2009 Beginning on or after January 1, 2009
Collection Due Process (CDP) Notice to taxpayer LLC's name, address and EIN SMO's name and address, EIN of assessment LLC's name, address and EIN
Request for CDP Hearing from taxpayer LLC's name, address and EIN SMO's name and TIN (EIN and/or SSN when the SMO is an individual) LLC's name, address and EIN
Notice of Federal Tax Lien LLC's name, address and EIN SMO's name and address, EIN of assessment LLC's name, address and EIN
Notice of Levy LLC's name, address and EIN SMO's name, address and EIN; may include SSN when SMO is an individual LLC's name, address and EIN
Seizure Documents LLC's name, address and EIN SMO's name and address, EIN of assessment LLC's name, address and EIN
IRC 6020(b) Actions LLC's name, address and EIN SMO's name, address and EIN LLC's name, address and EIN

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