In Rev. Proc. 2007-62 (released Oct. 9, 2007), the IRS has provided a new simplified method for taxpayers to request relief for late S corporation elections.
A small business corporation may make an election to be an S corporation at any time during the preceding tax year or at any time on or before the 15th day of the third month of the current tax year. The election is made on Form 2553, Election by a Small Business Corporation.
A late election is treated as having been made for the following tax year. However, the Service can treat the election as timely if it finds reasonable cause for the failure to meet the deadline. Rev. Proc. 97-48 provides procedures for obtaining automatic relief of certain late S corporation elections, and Rev. Proc. 2003-43 provides certain simplified procedures if the corporation’s Form 2553 was not timely filed with the proper service center.
To be eligible for the new relief under Rev. Proc. 2007-62, the corporation must meet certain requirements: The entity must fail to qualify for S corporation status solely because it did not file a timely Form 2553, and it must have reasonable cause for that failure. Also, the entity must not have already filed a tax return for the first tax year for which the election was intended. The application for relief must be filed within six months after the due date (excluding extensions) for the entity’s tax return. In addition, any taxpayer whose tax liability or tax return would be affected by the S corporation election (including all shareholders of the S corporation) must not have reported inconsistently with the S corporation election on any affected return for the year the S corporation election was intended.
The entity requests relief for a late S corporation election by filing a properly completed Form 2553 with its Form 1120S, U.S. Income Tax Return for an S Corporation, for the first tax year it intended to be an S corporation.
Caution: Relief is not automatic—the IRS will determine if the entity has satisfied the requirements of the revenue procedure. The entity may be required to file an amended return as a C corporation if its request is not granted. However, an entity that does not meet the requirements for relief under Rev. Proc. 2007-62 may request relief for a late S corporation election using the procedures of Rev. Proc. 97-48 or Rev. Proc. 2003-43.
A common issue that arises when a taxpayer discovers the failure to timely file an S election is the type of return to be filed pending IRS approval of the taxpayer’s request to treat a late filed election as timely. Rev. Proc. 2007-62 resolves this issue when the failure to timely file the election is discovered prior to the filing of the tax return, by providing that the request for relief should be filed with Form 1120S.
For a detailed discussion of the issues in this area, see “Service Expands Simplified Method Relief for Late S and Entity Classification Elections,” by Laura MacDonough, CPA, in the January 2008 issue of The Tax Adviser
—Alistair M. Nevius, editor-in-chief
The Tax Adviser
Also look for these articles in the January 2008 issue of The Tax Adviser :
A comprehensive guide to FIN 48 compliance
Complete coverage of recent corporate tax developments
A look at the Service’s recently expanded offset authority
IRS guidelines on domestic production deduction audits