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IRS Eases Relief Requirements for Missed S Elections

Copyright 2003, The Tax Resource Group, all rights reserved.

Background
Those kinder-gentler folks at the IRS have issued a new ruling making it easier to get relief for missed or late S elections. The ruling also applies to S corporation related elections such as the Q-Sub, QSST, and ESBT elections.

Previously, Rev. Proc. 98-55 allowed as much as 12 months from the due date of the election to take corrective action (i.e., filing the election). Under the old procedure, the taxpayer could apply for relief up until the due date of the first S corporation tax return (without extensions). Rev. Proc. 2003-43 was issued May 12, 2003 and potentially doubles that period of time to 24 months.

Qualifying for Relief
Here are the requirements for relief for the basic S election. The taxpayer must meet all the following requirements.

  • The sole defect is failure to file the election on time. 
  • The taxpayer has reasonable cause for failing to file the election.
  • No inconsistent tax returns have been filed by those taxpayers affected by the desired election.
  • If no S corporation return has been filed, corrective action is taken within 6 months of the due date of the S corporation return (without extensions). 
  • If the S corporation return has been filed, corrective action is taken within 24 months of the due date of the election. Note that the tax return must have been filed on or before six months past the un-extended deadline for the return.

Taxpayers who don't meet these standards can still apply for a private letter ruling to request relief.

What to Do:

Has the tax return for the first S tax year  been filed? 
If the tax return has not been filed, do the following.

  1. File Form 2553 with the appropriate IRS Service Center. Do so within 18 months of the original due date of the S election but in no event later than 6 months after the due date of the S corporation tax return (excluding extensions) for the first year in which the election was intended.
  2. Write "Filed Under Rev. Proc. 2003-43" across the top margin.
  3. Attach a statement establishing reasonable cause for the failure to file the S election.
  4. Form 2553 must be signed by an officer authorized to sign the corporate tax return and include signatures indicating the consent of 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 ends on the day the election is made.

Note that Item 4, above, is not explicitly mentioned in Rev. Proc. 2003-43 for taxpayers that have not already filed their first S corporation tax return even though such a statement is required by the Rev. Proc. for taxpayer who have filed their first tax return. I suspect that is an oversight that will be corrected in a future pronouncement. Of course, one would include shareholder consents on Form 2553 as a matter of course. The question is whether it is necessary to get consents from those who were shareholders at some point during the period for which the election is proposed to be effective but are no longer shareholders at the time the election is actually filed. Even if the would-be S corporation has not filed its first return, it would seem wise to get consent from anyone who has been a shareholder during the period for which the election is proposed to be effective even if that person is no longer a shareholder at the time the election is actually filed.

What to Do:

Has the tax return for the first S tax year  been filed? 
If the tax return has been filed, do the following.

  1. File Form 2553 with the appropriate IRS Service Center. Form 2553 must be filed within 24 months of the original due date of the S election.
  2. Write "Filed Under Rev. Proc. 2003-43" across the top margin.
  3. Attach a statement establishing reasonable cause for the failure to file the S election.
  4. Form 2553 must be signed by an officer authorized to sign the corporate tax return and include signatures indicating the consent of 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 ends on the day the election is made.
  5. Attach to Form 2553 statements from all shareholders during the period between the date the S corporation election was to have become effective and the date the completed election was filed that they have reported their income (on all affected returns) consistent with the S corporation election for the year the election should have been made and for all subsequent years.
  6. Attach to Form 2553 a dated declaration signed by an officer authorized to sign the corporate tax return stating: "Under penalties of perjury, I declare that, to the best of my knowledge and belief, the facts presented in support of this election are true, correct, and complete."

The IRS will determine whether the application meets the qualifications for relief and notify the taxpayer.

Robert O. Graves, CPA
The Tax Resource Group
May 23, 2003


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