By Thomas L. Wolf, CPA
The IRS has provided a simplified method for requesting relief for late-filed S corporation elections as well as late-filed corporate classification elections in conjunction with S elections. These new provisions affect taxpayers using S corporation and entity-classification elections in their tax planning.
On October 9, 2007, the Internal Revenue Service added Rev. Proc. 2007-62 to Internal Revenue Bulletin 2007-41. The procedure provides an additional simplified method for taxpayers to request relief for late S corporation elections, and also provided a simplified method for taxpayers to request relief for a late S corporation election and late corporate classification election intended to be effective on the same date. These methods are provided in addition to those provided by Rev. Proc. 2003-43 and Rev. Proc. 2004-48, which have been supplemented, as well as the letter ruling process ordinarily used to obtain relief for late elections. The new simplified methods should eliminate some of the headaches inherent in tax structuring when either an S corporation election, or an election by an eligible entity to be treated as a corporation effective for the same date as an S corporation election, has not been timely made. The process is improved to the extent that the taxpayer can make one combined filing of both the Form 1120S and the Form 2553, eliminating the risk that Form 1120S will be rejected by the Service while consideration of the late Form 2553 is pending. Further, user fees do not apply to these methods.
Simplified Method for Requesting Relief for Late-Filed S Corporation Elections
Qualifying entities may request relief by filing with the applicable office a properly completed Form 2553 along with a Form 1120S for the first taxable year that S corporation status was intended. Form 2553 must include a statement identifying reasonable cause for the failure to file the S corporation election in a timely manner. IRS also noted that the Form 2553 will be modified to allow for inclusion of such a statement.
If all of the following apply, generally the procedure will permit an entity to be granted relief for a late S corporation election:
· the entity fails to qualify on the first day that status was desired solely because of the failure to timely file Form 2553 with the applicable
Internal
Revenue
Service
Center
;
· it has reasonable cause for the failure to timely file Form 2553;
· it has not filed a tax return for the first taxable year in which the election was intended;
· its application for relief is filed no later than six months after the due date of the tax return, excluding extensions, for the first taxable year in which the election was intended; and
· no taxpayer whose tax liability or return would be affected by the election, including all of its shareholders, has reported inconsistently with the S corporation election on a return for the year in which the election was intended.
Late Corporate Classification Elections
Qualifying entities may request relief by filing a properly completed Form 2553 along with a Form 1120S for the first taxable year S corporation status was intended. When Form 2553 is timely filed, the classification election is automatic. Under the new procedure the Form 2553 must include a statement explaining the reasons for failure to timely file the S corporation election in combination with a corporate classification election, when all of the following apply:
· the entity is an eligible entity as defined in Reg. §301.7701-3(a);
· it intended to be classified as a corporation as of the intended effective date of the S corporation status; · it fails to qualify as a corporation solely because Form 8832 was not timely filed or was not deemed to have been filed under Reg. §301.7701-3(c)(1)(v)(C);
· it fails to qualify as an S corporation on the intended effective date solely because the S corporation election was not timely filed pursuant to IRC §1362(b);
· it has reasonable cause for the failure to timely file Form 2553 and Form 8832;
· it has not filed a tax return for the first taxable year in which the election was intended;
· the application for relief is filed no later than six months after the due date of the S corporation return, excluding extensions, for the first taxable year in which the election was intended; and
· no taxpayer whose tax liability or return would be affected by the election, including all of its shareholders, has reported inconsistently with the S corporation election on a return for the year in which the election was intended.
Rev. Proc. 2007-62 applies to S corporation elections and corporate classification elections intended to be effective for taxable years that end on or after December 31, 2007.
Tom Wolf, a certified public accountant, is the Managing Partner of Mengel, Metzger, Barr & Co. He may be contacted at twolf@mmb-co.com.
This article originally appeared in the 01-11-08 edition of The Daily Record.
