Automatic relief available for some missed elections

| 4/21/2022
Automatic relief available for some missed elections

As taxes have become more complex, understanding the pros and cons of making certain elections and making them in a timely and correct manner can feel daunting. Even when there is an intent to make an election, human error and unforeseen circumstances can interfere with correctly making a timely election. Taxpayers might be able to include a missed election or fix an incorrect election on a subsequent return that is filed on or before the extended due date of the return.

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Treasury Regulation Section 301.9100-3 provides that a taxpayer can submit a private letter ruling (PLR) to the IRS chief counsel national office requesting permission to file a regulatory election after the deadline. The IRS has discretion when deciding whether to grant this relief. To qualify for late election relief, taxpayers must show the IRS that they acted reasonably and in good faith and that the interests of the government will not be prejudiced. Submitting a request for a PLR can be costly – a mandatory user fee (currently $12,600) exists in addition to tax adviser fees to draft the request and shepherd it though the ruling process. The process also is time-consuming as it can take a significant amount of time to gather all of the information necessary to put together a PLR request and a response from the IRS generally takes four to six months.

Federal tax rules provide several opportunities to file late regulatory and some statutory elections without the cost, burden, and delay of filing a PLR, though automatic relief is time-limited and certain other requirements might apply. Taxpayers that do not qualify for automatic relief might still qualify for late election relief by filing a PLR and paying the user fee. Following are common automatic relief provisions and guidance.

Automatic 12-month extension

Under U. S. Department of the Treasury Regulation Section 301.9100-2(a), automatic relief for certain elections may be available if the taxpayer takes corrective action within 12 months from the due date of the election. If an election is required to be filed with a return, corrective action includes filing an original or amended return for the year the election should have been made and attaching the appropriate form or statement for making the election. If an election is not required to be filed with a return, corrective action is taking the necessary steps to file the election in accordance with the applicable guidance. The automatic 12-month extension is applicable to the following elections:

  • The election to use other than the required taxable year under IRC Section 444
  • The election to use the last-in, first-out inventory method under IRC Section 472
  • The 15-month rule for filing an exemption application for an IRC Section 501(c)(9), 501(c)(17), or 501(c)(20) organization under IRC Section 505
  • The 15-month rule for filing an exemption application for an IRC Section 501(c)(3) organization under IRC Section 508
  • The election to be treated as a homeowner’s association under IRC Section 528
  • The election to adjust basis on partnership transfers and distributions under IRC Section 754
  • The estate tax election to specially value qualified real property (when the IRS has not begun an examination of the filed return) under IRC Section 2032A(d)(1)
  • The Chapter 14 gift tax election to treat a qualified payment right as other than a qualified payment under IRC Section 2701(c)(3)(C)(i)
  • The Chapter 14 gift tax election to treat any distribution right as a qualified payment under IRC Section 2701(c)(3)(C)(ii)

Automatic six-month extension

Treasury Regulation Section 301-9100-2(b) provides an automatic extension of six months from the due date of the return to make a late statutory or regulatory election if all the following are satisfied:

  • The due date of the election is the due date of the return or the due date of the return including extensions.
  • The taxpayer timely filed its return for the year the election should have been made.
  • The taxpayer takes corrective action (as described with respect to automatic 12-month extensions) within the six-month period.
  • The election is not required to be made by the due date of the return without extension.

Automatic relief revenue procedures

The IRS has issued revenue procedures providing automatic late election relief. For example, Revenue Procedure 2003-33 provides relief for late Section 338(g) and Section 338(h)(10) elections with respect to a qualified stock purchase if the relief is requested within 12 months of the date of discovery of the missed election and other requirements set forth in the revenue procedure are satisfied.

Revenue Procedure 2013-30 provides relief for late S-corporation elections, electing small-business trust elections, qualified Subchapter S trust elections, qualified Subchapter S subsidiary elections, and late corporate classification elections under Section 1362. To be eligible for automatic relief, the requirements of the revenue procedure, including the requisite forms and supporting statements, must be filed within three years and 75 days after the intended effective date of the election.

Revenue Procedure 2009-41 provides automatic relief for late entity classification elections. This relief applies to both initial entity classification elections and elections to change an entity’s classification. To be eligible for automatic relief, the requirements of the revenue procedure, including the requisite forms and supporting statements, must be filed within three years and 75 days of the requested effective date of the eligible entity’s classification.

Takeaways

Taxpayers that discover that an election has been missed might have an opportunity to make a late election with the permission of the IRS after filing a request for a PLR and paying a user fee. In many cases, though, a less costly automatic extension of time to make an election might be available. Early discovery of the missed election and engagement of a tax adviser who is familiar with these procedures can help taxpayers obtain the results they intended in the most cost-efficient manner.

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The Dec. 15, 2021, event included a federal tax legislative update followed by two concurrent breakout sessions.

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Rochelle Hodes
Rochelle Hodes
Principal, Washington National Tax
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Lauren Shapiro
Washington National Tax