Fixing Late S Elections
To be an S corporation, a corporation must make a subchapter S election by no later than the fifteenth day of the third month of the taxable year for which the election is to be effective. If the election as not made on time, the corporation will be treated as a regular (that is, a subchapter C) corporation. This deadline was in the IRC; as such, the IRS did not have the authority to waive it and could not allow late elections. The inflexibility of this position proved to be troublesome, especially when S elections were inadvertently defective (and therefore considered untimely filed). Often, the corporation and the shareholders were not aware of an invalid S election until well after the tax year had ended, by which time both the corporation and the shareholders had already filed returns reporting their income consistent with S status. SBJPA All this changed with the passage of the Small Business Job Protection Act of 1996 (SBJPA), which granted the IRS the authority to waive the effects of an invalid S election caused by an inadvertent failure to qualify or to obtain the required shareholder consents. The IRS now may treat a late S election as timely if it determines there was reasonable cause for such failure. Since the SBJPA, the IRS has issued guidance on when corporations can request automatic relief for such "late" S elections: * When a corporation fails to qualify as an S corporation solely because its election was not timely filed. This means the entity intended to be an S corporation; the corporation and its shareholders reported their income consistent with S status for the year the election should have been made and for all subsequent years; and the IRS did not notify the corporation or any of the shareholders of any problem with its S status within six months of the date on which the corporation's S corporation return was timely filed. Automatic relief. To get automatic relief, the corporation must file a completed S election, signed by an authorized corporate officer and by all persons who were shareholders at any time during the period the entity had intended to be an S corporation. Attached must be a dated declaration, signed by those same persons, attesting that the corporation and the shareholders reported all their income (on all affected returns) consistent with S status for the year the S election should have been made and all subsequent years and signed under penalties of perjury. …