IRS provides relief for certain corporations.
From The Tax Adviser:
Fixing Late S Elections
T o be an S corporation, a corporation must make a subchapter S election by no later than the fifteenth day of the third month of the taxable year for which the election is to be effective. If the election is not made on time, the corporation will be treated as a regular (that is, a subchapter C) corporation. This deadline was in the IRC; as such, the IRS did not have the authority to waive it and could not allow late elections.
The inflexibility of this position proved to be troublesome, especially when S elections were inadvertently defective (and therefore considered untimely filed). Often, the corporation and the shareholders were not aware of an invalid S election until well after the tax year had ended, by which time both the corporation and the shareholders had already filed returns reporting their income consistent with S status.
All this changed with the passage of the Small Business Job Protection Act of 1996 ( SBJPA ), which granted the IRS the authority to waive the effects of an invalid S election caused by an inadvertent failure to qualify or to obtain the required shareholder consents. The IRS now may treat a late S election as timely if it determines there was reasonable cause for such failure.
Since the SBJPA , the IRS has issued guidance on when corporations can request automatic relief for such "late" S elections:
Automatic relief . To get automatic relief, the corporation must file a completed S election, signed by an authorized corporate officer and by all persons who were shareholders at any time during the period the entity had intended to be an S corporation. Attached must be a dated declaration, signed by those same persons, attesting that the corporation and the shareholders reported all their income (on all affected returns) consistent with S status for the year the S election should have been made and all subsequent years and signed under penalties of perjury.
Automatic relief . To get relief, a corporation must follow the same procedures as above, agreeing to amend its returns for the first year and any other affected returns to reflect S status.
Relief . Within six months of the original due date for the S election, the corporation must file a completed S election, signed by an authorized corporate officer and by all persons who were shareholders at any time during the period that began on the first day of the taxable year for which the election is to be effective and ending on the day the election is made. A statement explaining the reason for the failure to file a timely S election must be attached. If the IRS determines there was reasonable cause for the failure to timely file the S election, it will notify the corporation of its determination.
For a discussion of the "reasonable cause" relief for late S elections and other recent developments, see the Tax Clinic, edited by Anthony Bakale, in the August 1998 issue of The Tax Adviser .
Nicholas Fiore, editor
The Tax Adviser