When a business in the United States decides to close its doors, there are several legal and financial steps that must be followed to ensure proper dissolution. One crucial step in this process is handling the Employer Identification Number (EIN) assigned by the Internal Revenue Service (IRS). Although an EIN is a permanent identifier for a business, it can be closed or canceled in specific circumstances. This guide provides an in-depth look at the process of canceling an EIN when dissolving a company in the U.S.
Understanding EIN and Its Purpose
An Employer Identification Number (EIN) is a nine-digit number assigned by the IRS to businesses for tax purposes. It is used for:
- Filing federal and state taxes
- Opening business bank accounts
- Hiring employees
- Applying for business licenses
Even if a company no longer operates, the EIN remains valid and can be used if the business is reactivated. However, it is essential to inform the IRS about the company’s closure to avoid unnecessary tax obligations and compliance issues.
Steps to Cancel an EIN When Dissolving a Company
1. Fulfill Tax Obligations
Before closing an EIN, a company must settle all outstanding tax liabilities. This includes:
- Filing Final Tax Returns: Submit the final federal and state tax returns. Check the “final return” box on the forms (e.g., Form 1120 for corporations, Form 1065 for partnerships, or Schedule C for sole proprietors).
- Paying All Taxes Due: Ensure that federal, state, and local taxes are fully paid, including employment taxes, sales taxes, and excise taxes.
- Closing Payroll Tax Accounts: If the business has employees, file the final employment tax returns (Forms 941 or 944) and issue W-2s to employees.
2. Dissolve the Business Entity
Depending on the type of business entity, different legal steps must be taken to dissolve the company formally:
- Corporations and LLCs: File Articles of Dissolution with the state where the business was registered.
- Partnerships and Sole Proprietorships: Though formal dissolution may not be required, notifying relevant state and federal authorities is advisable.
- Cancel Business Licenses and Permits: Notify local authorities to cancel any business permits or registrations.
3. Close Business Accounts
- Bank Accounts: Close business checking and savings accounts.
- Credit Accounts: Settle outstanding debts and close business credit cards or loans.
- Contracts and Leases: Terminate office leases, vendor contracts, and utility services.
4. Notify the IRS About EIN Cancellation
After completing the above steps, a formal request must be submitted to the IRS to close the EIN. Follow these steps:
Prepare a Written Request
Draft a letter to the IRS that includes:
- The complete legal name of the business
- The EIN assigned to the business
- The business address
- The reason for closing the EIN (e.g., business closure)
- A statement confirming that all tax obligations have been fulfilled
Attach Supporting Documents
Include supporting documents such as:
- A copy of the IRS notice assigning the EIN
- Proof of business dissolution (Articles of Dissolution, final tax return, etc.)
Send the Request to the IRS
Mail the request to the following address: Internal Revenue Service Cincinnati, OH 45999
The IRS does not allow EIN cancellation requests via phone or email, so the letter must be mailed.
5. Follow Up with the IRS
After submitting the request, wait for confirmation from the IRS. The processing time varies but typically takes 45-60 days. If no response is received, contact the IRS Business & Specialty Tax Line at (800) 829-4933 for an update.
What Happens After an EIN is Canceled?
Once the IRS processes the request, the EIN is marked as closed in their system. However, the EIN itself is never fully deactivated. If the business reopens in the future, the same EIN may be used. If a new business is started under a different structure, a new EIN will be required.
Common Mistakes to Avoid
- Failing to File Final Tax Returns: Not submitting final returns can lead to penalties and tax liabilities.
- Not Closing Business Accounts: Leaving accounts open may result in ongoing fees or tax obligations.
- Sending an Incomplete Request to the IRS: Missing information or documents can delay the EIN closure process.
- Assuming an EIN is Automatically Canceled: Simply stopping business activities does not cancel the EIN; formal notification to the IRS is required.
Conclusion
Canceling an EIN when dissolving a company in the U.S. requires careful planning and proper communication with the IRS. By settling tax obligations, officially dissolving the business, and submitting a written request to the IRS, business owners can successfully close their EIN and prevent future compliance issues. Ensuring all steps are completed properly will help avoid unnecessary complications and legal consequences.