To be taxed as an S corporation, an election must be filed with the IRS at any time during the tax year before the election year, or it can be made effective retroactively to the first day of the tax year if made on or before the 15th day of the third month of that tax year. Taxpayers seem to have a lot of problems meeting this deadline, and for years the IRS has offered various methods of relief for late filed elections.
The relief continues - in Rev.Proc. 2007-62, an additional method for having a late election accepted by the IRS has been promulgated. Under this Revenue Procedure, the IRS will respect a late filed election under the following conditions:
--The entity fails to qualify for its intended status as an S corporation on the first day that status was desired solely because of the failure to file a timely Form 2553 with the applicable campus;
--It has reasonable cause for its failure to file a timely Form 2553;
--It has not filed a tax return for the first tax year in which the election was intended;
--The application for relief is filed no later than 6 months after the due date of the tax return (excluding extensions) of the entity seeking to make the election for the first taxable year in which the election was intended; and
--No taxpayer whose tax liability or tax return would be affected by the S corporation election (including all shareholders of the S corporation) has reported inconsistently with the S corporation election, on any affected return for the year the S corporation election was intended.
While helpful, this method can only be used where reasonable cause for the failure to timely file exists. A key benefit of this method is that no private letter ruling filing fee applies.
If an entity cannot use this method, it can explore the availability of the other relief methods under Rev.Proc. 97-48 and Rev.Proc. 2003-48.