Tardy S Election Is No Reason To Freak Out
When I was a new lawyer nearly 25 years ago, a tardy S-election was a legitimate reason to freak out. Fortunately, that is no longer the case.
The Internal Revenue Code defines an “S corporation” as, “with respect to any taxable year, a small business corporation for which an election under section 1362(a) is in effect for such year.” An election under § 1362(a) is in effect for a taxable year if the election is made (1) during the preceding taxable year, or (2) on or before the 15th day of the third month of the taxable year. The failure to file a timely election used to be a matter of considerable concern. But the Internal Revenue Service has made it much easier for taxpayers to request relief for late S corporation elections.
Section 1362 provides that the Secretary may treat a late election as timely made for the taxable year if the Secretary “determines that there was reasonable cause for the failure to timely make such election.” The Internal Revenue Code does not define what is “reasonable cause,” but the IRS has generally set a pretty low bar for satisfying that standard. In one instance, for example, the IRS ruled that it would accept an S corporation election that was filed late simply because the employee who was supposed to mail in the election did not actually mail it. As a result, the only real hurdle to filing a late election is making sure that the necessary procedures are complied with.
Those procedures are set forth in Revenue Procedure 2013-30, which took effect on September 3, 2013. There are four general requirements for obtaining relief for a late S corporation election: (1) the entity requesting relief intended to be classified as an S corporation as of the effective date of the election; (2) the requesting entity failed to qualify as an S corporation solely because the election was not timely filed; (3) there is reasonable cause for the failure to make a timely election and the entity acted diligently to correct the mistake upon its discovery; and (4) the entity requests relief from the IRS under Revenue Procedure 2013-30 within 3 years and 75 days from the effective date of the election.
If the four general requirements are satisfied, then the entity seeks relief for a late election by completing the standard election on Form 2553 and (1) attaching it to the S corporation’s current year Form 1120S, (2) attaching it to one of the corporation’s prior year Forms 1120S, or (3) filing it with the IRS independent of Form 1120S. The late election form must state at the top that is being “FILED PURSUANT TO REV. PROC. 2013-30.” The election form must also include a “Reasonable Cause Statement,” expressly made under penalty of perjury, that describes (1) the entity’s reasonable cause for failure to make a timely election, and (2) its diligent actions to correct the mistake upon its discovery. The election form must also include statements from all of the S corporation’s shareholders, also made under penalty of perjury, that they have reported their income on all affected returns consistent with the S corporation election for the year the election should have been filed and for all subsequent years. There are additional requirements if the entity is also requesting a late corporate classification to be effective on the same date that the S corporation election was intended to be effective.
All in all, it is a relatively painless procedure, considering the involvement of the IRS. So long as the late election would otherwise be valid, and it is made within 3 years and 75 days of the effective date of the election, relief should routinely be granted by the IRS. Accordingly, while it is always preferable to get an S corporation election filed on time, there are occasions when that may not be possible, for whatever reason. On those occasions, there is no need to stress about making a tardy election using the procedures laid out by the IRS in Revenue Procedure 2013-30.
Id. § 1362(b); 26 C.F.R. § 1.1362-6(a)(2)(ii). An election made after the 15th day of the third month of the taxable year and on or before the 15th day of the third month of the following taxable year is treated as being for the following taxable year. 26 U.S.C. § 1362(b)(3); 26 C.F.R. § 1.1362-6(a)(2)(ii).
Id. § 4.03(1). If the late S corporation election is attached to a Form 1120S, then the Form 1120S must also state at the top that it “INCLUDES LATE ELECTION(S) FILED PURSUANT TO REV. PROC. 2013-30.” Id. § 4.03(2)(a).
The IRS has even provided a helpful flow chart indicating when relief is available under Revenue Procedure 2013-30. Relief for Late S Corporation Elections, available at https://www.irs.gov/pub/irs-drop/rp-13-30.pdf. The flow chart appears at the end of the Revenue Procedure. If relief is not available under Revenue Procedure 2013-30, the entity can still seek to obtain relief by requesting a private letter ruling.