S Corporation Late Election Relief
A corporation may make the S election on Form 2553 as follows: 1) At any time during the preceding year; or 2) At any time during the tax year the election is to be effective as long as it is made by no later than the 15th day of the third month of that tax year. When the election is not filed, the corporation is treated as a C Corporation and its losses/gains are taxed to the corporation. When the corporation properly files an S Election, gains and losses are taxed to its individual owners.
There is limited relief for taxpayers who have failed to make the S election, but have reasonable cause. IRS guidance is provided in Rev. Proc. 2013-30 on late S election relief. Generally, there is limited relief available when the corporation fails to qualify as an S Corporation solely because it failed to file the Form 2553, but has filed all returns reporting income consistently as an S Corporation and seeks relief up to 3 years and 75 days from the election due date (see below).
The following requirements must be met in order to qualify for late S Corporation election relief:
1) The corporation intended to be classified as an S Corporation, is an eligible entity, and failed to qualify as an S Corporation solely because the election was not timely;
2) The entity has reasonable cause for its failure to timely file the election--A “Reasonable Cause/Inadvertence Statement” must be attached to the Form 2553 describing the reasonable cause for failure to timely file the “S” election and the diligent actions taken by the corporation to correct the mistake upon discovery—it requires a signed and dated perjury declaration;
3) The corporation and its shareholders reported income consistent with an S Election in effect for the year the election should have been made and all subsequent years; and
4) Less than 3 years and 75 days have passed since the effective date of the election. There is an exception to this rule—see below.
Exception to the 3 year and 75 day rule
The corporation qualifies for an exception to the 3 year and 75 day rule when:
1) The corporation has been legally formed as a corporation (not an LLC, etc.);
2) The corporation intended to be classified as an S Corporation, is an eligible entity, and failed to qualify as an S Corporation solely because the election was not timely;
3) The corporation and its shareholders reported income consistent with an S Election in effect for the year the election should have been made and all subsequent years;
4) At least 6 months have passed since the corporation filed its tax return for the first year the corporation intended to be an S corporation.
5) Neither the corporation nor any of its shareholders have been notified by the IRS of any problems regarding the S corporation status/election within 6 months of the date on which the Form 1120S for the first year was timely filed; and
6) The completed Election form includes the statements as described in the revenue procedure.
Although the exception to the 3 year and 75 day rule exists, it is unlikely that many taxpayers will qualify as the IRS notifies the corporation of the problem with its filing requirement (lack of S election) when the return is rejected in processing.
Procedure for Requesting Relief: A taxpayer requests relief under Rev. Proc. 2013-30 by completing the proper election forms, attaching the required supporting documents, and filing them. The late election form must indicate at the top that it is filed "filed pursuant to Rev. Proc. 2013-30." A Form 1120S that includes a late election must state at the top "includes late election(s) filed pursuant to Rev. Proc. 2013-30." Supporting statements, including a "Reasonable Cause/Inadvertence Statement" indicating compliance with Sec. 4.03(3) of Rev. Proc. 2013-30 , must be signed under penalty of perjury.
Upon receipt of a completed request for relief, IRS will determine whether the requirements for granting additional time to make missed S elections have been met, and the taxpayer will be notified of the outcome.
If the corporation does not qualify for relief under Rev. Proc. 2013-30, then it may request a private letter ruling. The IRS user fee for letter rulings is currently $18,000.
See flow chart below for S Election Relief.
Published by Gene M. Bowman, Attorney at Law
Tax Attorney, CPA