Fixing Missed Tax Elections

Federal tax rules are complicated, and even with the best planning, mistakes can happen. Some of the most common mistakes are missed elections. Some elections are required to be made on tax returns, while others have due dates untethered to tax return due dates. Some elections are integral to the tax treatment of a transaction, while others are related to how the tax year’s items are to be treated on the return.

Given these complexities, the due date for making a federal tax election sometimes gets missed. The good news is that in many cases options exist to make late elections, though there are more options for relief from missed regulatory elections than there are for missed statutory elections. Under Treasury Regulation Section 301.9100-1(b), a regulatory election is an election with a due date prescribed by a regulation, revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin, while a statutory election is an election with a due date prescribed by statute.

Automatic relief under Treasury Regulation Section 301.9100-2

Under Treasury Regulation Section 301.9100-2(a), automatic relief for certain regulatory elections might 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 (or administrative adjustment request for a partnership subject to the centralized partnership audit rules) 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 involves taking the necessary steps to file the election in accordance with the applicable guidance. Treasury Regulation Section 301.9100-2(a) lists the elections eligible for relief under it, including the election to use a tax year other than a required tax year under Section 444; the election to use the last-in, first-out inventory method under Section 472; and the election to adjust basis on partnership transfers and distributions under Section 754.

Treasury Regulation Section 301-9100-2(b) is the only provision that allows limited relief for missed statutory elections. The regulation provides an automatic extension of six months from the due date of the return to make a late statutory or regulatory election if all of 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 (described above 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.

Revenue procedures offering automatic relief

The following revenue procedures are commonly used for obtaining automatic late election relief:

• Revenue Procedure 2003-33 provides automatic 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 automatic 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. Automatic relief is available if requested within three years and 75 days after the requested effective date of the election and other requirements set forth in the revenue procedure, including filing the requisite forms and supporting statements, are satisfied.
• 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. Automatic relief is available if requested within three years and 75 days of the requested effective date of the classification and other requirements set forth in the revenue procedure, including filing the requisite forms and supporting statements, are satisfied.

Discretionary relief for late regulatory elections

If automatic relief is unavailable or the criteria to obtain automatic relief aren’t satisfied, taxpayers can request relief for missed regulatory elections under Treasury Regulation Section 301.9100-3 by filing a private letter ruling (9100 request). The user fee for a 9100 request is less than the general private letter ruling user fee (currently $14,500). The user fee generally is nonrefundable and is in addition to professional fees the taxpayer incurs to file the request. Relief under Treasury Regulation Section 301.9100-3 is conditioned on the taxpayer acting reasonably and in good faith and the relief not causing prejudice to the government. Affidavits signed under penalties of perjury by the taxpayer and parties having knowledge of the missed election and the discovery of the missed election are required to be submitted as part of the 9100 request.

Crowe observation

Requesting a private letter ruling is more costly and burdensome than automatic relief. However, given the short window for automatic relief, a private letter ruling might be a taxpayer's only recourse.

Looking ahead

Errors happen, but the good news is relief is available for many missed elections. Taxpayers that identify a missed election should quickly consult their tax advisers to determine whether relief is available.