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08-22-2013 IRS Issues New Procedure to Correct Late S-Corp Related Elections

Summary:
Rev. Rul. 2013-30 provides a simplified method for taxpayers requesting relief for certain late elections related to subchapter S status, including late elections for S corporations, electing small business trusts, qualified subchapter S trusts, qualified subchapter S subsidiaries, and corporate classifications in conjunction with a late S election.

Article:
Business owners, certain trusts and other taxpayers can easily and unintentionally miss the deadline for filing a status tax election. This is especially true in situations involving S corporations, where written elections are often required to avoid default rules and where the exact deadline varies depending on the specific type of election. Thankfully, the IRS issued a new revenue procedure consolidating numerous prior rulings and guidance to streamline the correction process for these missed deadlines.

Effective September 3, 2013, Rev. Proc. 2013-30 provides simplified methods for taxpayers to request relief for certain late elections, without a letter ruling and without a user fee (but in the event the taxpayer does not qualify for relief under Rev. Proc. 2013-30, a letter ruling may still be requested).

These methods, which are all similar but not quite identical, are summarized as follows:

Late S Corporation Election
- Normal Process: A corporation and its shareholders normally must elect S corporation status by filing a Form 2553 no later than the 15th day of the third month during the year that the election will be effective.

- Correction Requirements:

  • Intent to have been classified as an S corporation as of the desired effective date
  • Failure to qualify solely because of a failure to timely file Form 2553
  • Reasonable cause for failure to timely file
  • Diligent attempt to correct mistake upon discovery
  • Statement under penalty of perjury from all shareholders that income has been reported consistently with an S corporation election since the desired effective date
  • Completed Form 2553 signed by authorized officers and all shareholders existing at any time since the desired effective date
  • Less than 3 years and 75 days since the desired effective date OR indefinitely if the corporation and all shareholders reported income consistent with an S corporation election, at least 6 months have passed since filing a return with the IRS claiming S status, and there has been no notice from the IRS on the issue.

- Note: A taxpayer who failed to complete Form 8832 to elect to be a corporation rather than a default partnership or sole proprietorship can correct this issue at the same time, provided it is an eligible entity and it has been less than 3 years and 75 days since the desired effective date.

Late Electing Small Business Trust or Qualified Subchapter S Trust Election
- Normal Process: The trust must sign and file an election statement with the applicable IRS service center no later than the 16th day of the second month that the S corporation stock is transferred to the trust and the election will be effective, or else the S corporation's election will be invalid/terminated.

- Correction Requirements:

  • Intent to have been classified as an ESBT or QSST as of the desired effective date
  • Failure to qualify solely because of failure to timely file the election statement
  • Inadvertence for failure to timely file
  • Diligent attempt to correct mistake upon discovery
  • Resulted in invalid election or termination of S corporation status
  • Statement under penalty of perjury from all shareholders that income has been reported consistently with an S corporation election since the desired effective date
  • Completed election form signed by trustee or current income beneficiary along with statement of information required for election
  • Less than 3 years and 75 days since the desired effective date

Late Qualified Subchapter S Subsidiary Election
- Normal Process: The corporation must file a Form 8869 to make it a qualified wholly-owned subsidiary of a parent S corporation no later than 2 months and 15 days after the desired effective date.

- Correction Requirements:

  • Intent to have been classified as a QSub as of the desired effective date
  • Failure to qualify solely because of failure to timely file the Form 8869
  • Reasonable cause for failure to timely file
  • Diligent attempt to correct mistake upon discovery
  • Statement under penalty of perjury from parent shareholder that assets, liabilities, income, deductions, and credits have been reported consistently with a QSub election since the desired effective date
  • Completed election form signed by parent S corporation showing that the subsidiary qualifies
  • Less than 3 years and 75 days since the desired effective date

Provided that all applicable correction requirements can be met, the taxpayer can submit the request either directly to the IRS service center or by attaching it to the Form 1120S. The election form should state "Filed Pursuant to Rev. Proc. 2013-30" and the Form 1120S, if applicable, should state "Includes Late Election(s) Filed Pursuant to Rev. Proc. 2013-30." Multiple late elections with respect to a single S corporation may, but are not required to, be filed at once.

Fraser Stryker PC LLO is experienced in tax matters of all types. If you have questions about elections related to an S corporation, or need assistance in correcting a missed election, contact Nicole R. Konen.

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This article is provided by Fraser Stryker for general informational purposes and is not intended to be and should not be construed as legal advice on any specific facts or circumstances.

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