Late elections relief: new rules further streamline elections process.

For tax years ending after Dec. 30, 2007, Rev. Proc. 2007-62 (IRB 2007-41, Oct. 9, 2007) provides another simplified method for taxpayers to request relief for late S corporation elections.

This revenue procedure also provides a simplified method for taxpayers to request relief for a late S corp election and a late corporate classification election intended to be effective on the same date that the S corp election was intended to be effective. User fees do not apply to corrective actions under Rev. Proc. 2007-62.

Background

Late S Elections

IRC Sec. 1362(b)(5) provides that the IRS may treat a late or nonexistent election as timely if the IRS determines there was reasonable cause for failing to elect timely.

Rev. Proc. 97-48 contains special procedures to obtain automatic relief for certain late S elections. Generally, relief is available if:

* A corporation intends to be an S corp;

* The corporation and its shareholders reported their income consistent with S status for the tax year the election should have been made and for every subsequent year; and

* The corporation did not receive notification from the IRS regarding any problem with S status within six months of the date that Form 1120S, U.S. Income Tax Return for an S Corporation, for the first year, was timely filed.

Rev. Proc. 2003-43 provides, in part, a simplified method to request relief for a late election where the entity fails to qualify as an S corp solely because it failed to timely file the election with the applicable IRS "campus" (formerly "service center").

Under this revenue procedure, certain entities may be granted relief for failing to file timely elections if the request for relief is filed within 24 months of the election's due date. Rev. Proc. 2007-62 supplements Rev. Proc. 2003-43.

Entity Classification Elections

Regs. Sec. 301.7701-2(a) defines a "business entity" as any entity recognized for federal tax purposes that is not properly classified as a trust or otherwise subject to special IRC treatment.

Regs. Sec. 301.7701-3(a) provides that a business entity not classified as a corporation under various provisions in Regs. Sec. 301.7701-2(b) is an "eligible entity" and can elect its classification for federal tax purposes.

Under Regs. Sec. 301.7701-3(b)(1), unless the entity otherwise elects, a domestic eligible entity is:

* A partnership -- if it has two or more members; or

* Disregarded as an entity separate from its owner -- if it has a single owner.

Regs. Sec. 301.7701-3(c)(1) generally provides that an eligible entity may elect to be classified other than as provided in Regs. Sec. 301.7701-3(b) by filing Form 8832, Entry Classification Election, with the campus designated on this form.

Late Entity Classification Elections

Rev. Proc. 2004-48 provides a simplified method to request relief for a late S election and a late corporate classification election intended to be effective on the same date the S election was intended to be effective. Rev. Proc. 2007-62 supplements Rev. Proc. 2004-48.

Additional Relief for Late S Elections Under Rev. Proc. 2007-62

Eligibility Requirements

1. The entity fails S status solely because it failed to timely file Form 2553 with the applicable campus;

2. Reasonable cause exists for this failure;

3. The entity has not filed a tax return for the first tax year for which the election was intended;

4. The application for relief is filed under Rev. Proc. 2007-62 not later than six months after the due date (excluding extensions) of the entity's tax return for that tax year; and

5. No taxpayer whose tax liability or return would be affected by the election, including all shareholders of the S corp, has reported inconsistently with this election on any affected return for the year the S corp election was intended.

Procedural Requirements

An entity may request relief by filing with the applicable campus a properly completed Form 2553, together with Form 1120S for the first intended S year, including a statement establishing reasonable cause for failing to timely file the S election, not later than six months after the tax return's due date (excluding extensions). These items constitute the relief application.

IRS Action

The IRS will then determine whether the requirements for granting relief for the late election are satisfied.

Additional Relief for Late S Elections and Late Corporate Classification Elections Under Rev. Proc. 2007-62

Similar eligibility and procedural requirements and IRS action apply. See Rev. Proc. 2007-62, Section 5.

Entities Not Qualifying for Rev. Proc. 2007-62 Relief

Relief for late S elections can be requested under Rev. Procs. 97-48 or 2003-43. Relief for late S elections and late corporate classification elections can be requested under Rev. Proc. 2004-48. No user fees apply.

Entities not qualifying for relief under these revenue procedures can request a letter ruling. User fees apply.

Stuart R. Josephs, CPA has a San Diego-based Tax Assistance Practice (TAP) that specializes in assisting practitioners in resolving their clients' tax questions and problems. Josephs, chair of the Federal Subcommittee of CalCPA's Committee on Taxation, can be reached at (619) 469-6999 or stuartrjosephs@yahoo.com.

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By Stuart R. Josephs, CPA