Simplified Method Relief for Late S and Entity Classification Elections

In Rev. Proc. 2007-62, the Service provides an additional simplified method for certain eligible entities to request relief for late S elections and for late entity classification elections that were intended to be effective as of the intended effective date of the S election. This revenue procedure supplements Rev. Procs. 2003-43 and 2004-48.

To obtain relief under Rev. Proc. 2007-62, the entity must file a properly completed Form 2553, Election by a Small Business Corporation, witha Form 1120S, U.S. Income Tax Return for an S Corporation, filed by the entity for the first tax year the entity intended to be an S corporation. The forms must be filed together no later than six months after the due date of the tax return (excluding extensions) of the entity for the first tax year in which the S election was intended. In addition, the Form 2553 must include a statement explaining the reason for the failure to timely file the election(s).

For Rev. Proc. 2007-62 to apply, the entity seeking to make the S election cannot have filed a tax return for the first tax year in which the election was intended prior to requesting relief under the revenue procedure. In addition, the entity must fail to qualify for S corporation status on the first day that status was desired solely because of its failure to timely file a Form 2553 with the correct IRS service center, and the entity must have reasonable cause for this failure. Further, all taxpayers whose tax liability or tax returns would be affected by the S corporation election (including all shareholders of the S corporation) must have reported consistently with the S corporation election on any affected return for the year the S corporation election was intended. Rev. Proc. 2007-62 is effective for S elections and corporate classification elections intended to be effective for tax years that end on or after December 31, 2007.

Implications

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. Because relief under Rev. Proc. 2007-62 requires a finding by the IRS of reasonable cause (i.e., it is not automatic), a taxpayer may be required to file an amended return as a C corporation if its request is not granted. However, if relief under Rev. Proc. 2007-62 is not granted, an entity may request relief for a late S corporation election following the procedures of Rev. Procs. 97-48 or 2003-43, or for relief for a late S corporation election and a late corporate classification election following the procedures of Rev. Proc. 2004-48. If the entity does not qualify for relief under these procedures, it may apply for relief by requesting a letter ruling.

Given that the IRS appears willing to allow a taxpayer to file a return as an S corporation pending its approval of the taxpayer’s request for relief, it may be appropriate for a taxpayer to file an S corporation return pending approval of a request for relief made under a different revenue procedure or to the IRS National Office. In this case, it would be prudent to disclose the pending request for relief in the S corporation return.

Editor Notes:

David J. Kautter, CPA Ernst & Young LLP Washington, DC

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

If you would like additional information about these items, contact Mr. Kautter at (202) 327-8878 or david.kautter@ey.com.