For many businesses, electing S corporation status is a critical tax strategy. It can reduce what you spend on self-employment taxes while simplifying profit distribution. But what happens when you find out that the IRS never processed or accepted your S-corp election?
Unfortunately, this situation is fairly common – and that’s why the IRS allows a late S-corp election relief. This restores your intended tax status without penalties or extensive extra work. Learn more about how to apply for late S-corp election relief and how the tax resolution team at Wiggam Law can help. Call us at 404-609-1300 to discuss your business’s tax needs in greater detail.
Key Takeaways
- 75 days – You typically have 75 days from forming your business to file your S-corp election form.
- Grace period – You generally have three years and 75 days to request a late S-corp election.
- Explain the delay – Be ready to provide proof of reasonable cause for your failure to elect on time.
- Work with a tax professional – They can help you submit the proper forms and documentation.
Signs That Something’s Gone Wrong
Many business owners don’t realize that their S corporation election was never accepted by the IRS until they’ve already started operating as an S corporation. The red flags often start when the business owner receives IRS Letter 3853C, which notifies them that their election wasn’t processed or approved.
Another key sign is tax return rejection. If you file a return as an S corporation without having finished your S corporation election, the IRS will return it to you.
Perhaps the worst situation is when you’re audited. You have the files and documents for your S corporation to show the auditor, only to find out that there is no S-corp election on file.
Why does this happen? There are several reasons an election may not be processed or granted:
- The election was filed after the 75-day deadline.
- The submitted form was incomplete, unsigned, or didn’t have shareholder consent.
- The election was mailed to the wrong IRS address or never reached its destination.
- The business owner assumed someone else handled it, but they never did.
- The IRS lost or misprocessed the form.
The Consequences of No Election
Regardless of the reason your S-corp election was never processed or approved, the tax consequences can be serious. If the IRS doesn’t process or approve your S-corp election, your business is taxed as its default structure.
If your business is a C corporation, it’s subject to corporate tax on profits and is then taxed again on dividends to shareholders. Income from sole proprietorships passes through to the owner, and the entirety is subject to self-employment tax. A partnership must file IRS Form 1065, allocate income to partners, and then pay self-employment taxes on those earnings.
The fallout depends on which type of business your company is without S-corp election. You may be subject to surprise back taxes and penalties if you have been filing as an S-corp without IRS approval. You may also get your returns rejected or face an audit if the IRS realizes that your returns do not match their records. Finally, you could have trouble making payroll, paying out distributions, or paying shareholder compensation if your entity is reclassified.
Consider this example, which is exactly what many business owners have gone through after realizing their S-corp election was never processed. You submitted your S-corp election, assumed it was approved, and started paying yourself a reasonable salary and filing 1120-S returns.
The IRS realizes that you were never actually an S-corp, resulting in your past tax returns being invalidated. You may then be subject to back taxes, penalties, and interest on the full amount if you are reclassified as a C-corp or sole proprietorship.
Relief Exists – Late Election
While this is stressful and can lead to significant financial penalties if not resolved, the IRS provides a way for business owners to seek relief. They recognize that many business owners apply for S-corp election and begin filing as an S corporation in good faith, not as a way to defraud the agency. Revenue Procedure 2013-30 offers a simplified process for companies to request late election relief.
Basically, the process allows you to ask the IRS to retroactively approve your election if you intended to be an S-corp, met all eligibility requirements, and have been operating as an S-corp.
However, this option isn’t available forever. You typically have up to three years and 75 days from the date that the election was intended to be effective to request a late election via IRS Form 2553. There are some exceptions, but only certain companies actually qualify for them. However, if the IRS has previously notified you that your election was not accepted, you must be able to explain why you did not take immediate action to correct the issue.
Eligibility for Late Election Relief
Before you apply for late election relief, it’s important to go through the eligibility criteria and verify that you qualify. These requirements include:
- Solely failed to qualify as an S corporation because the election was not on time.
- Had reasonable cause for the failure to make the election timely.
- Entity and shareholders reported their income as an S-corp would for the year in which the election would have been made, as well as all subsequent years.
- Filed all required tax returns that would have been required for an S-corp.
- Qualified as an eligible entity under IRC § 1361.
If a business doesn’t qualify under the Revenue Procedure provisions, the business can’t file for late election relief. Instead, they can only request a private letter ruling. This is a formal, costly, and complex process that involves a direct application to the IRS Office of Chief Counsel and almost always requires the assistance of a tax attorney.
What Counts as Reasonable Cause
The IRS doesn’t give an explicit list of which reasons do and do not count as “reasonable cause.” Essentially, you have to show the IRS that you intended to file on time and that your failure to file on time was inadvertent. A few examples of what may be considered reasonable cause include:
- You genuinely believed the election was filed.
- You relied on a professional who misunderstood the filing requirement or hid from you that they missed the filing deadline.
- Your form was mailed to the wrong address or lost in transit.
- You weren’t aware of the 75-day deadline but immediately tried to remedy the issue once you became aware.
You’ll need any evidence you have of your good faith efforts to file on time. You might provide certified mail or fax receipts showing when the form was initially sent, copies of your 1120-S returns, and account transcripts indicating that your business was treated as an S-corp. The more consistent your records and story are with the timeline you present, the more likely the IRS will believe that your failure to file on time was accidental.
Filing or Re-Filing the Election
To request a late election, you must file Form 2553. You may need to provide additional forms or applications, depending on your circumstances and the boxes you check as you go through Form 2553.
Check the form carefully as you work through it and ensure that you attach all the requested documentation and evidence. Procedure 2013-30 specifies that you should include a reasonable cause and inadvertence statement that outlines your reasonable cause for failing to file on time or your inadvertent late filing. It should also specify the actions you took to repair the situation once you realized you didn’t file on time.
When you submit the form, ensure that you send it to the correct IRS facility. The address you send to depends on where you’re mailing from; the addresses are given in the instructions for Form 2553.
When filing or re-filing the election, watch out for these common errors:
- Missing shareholder consent signatures.
- Incorrect EIN or effective date.
- Using the wrong IRS address.
These issues can lead to further delays and could even put you outside the late election window.
What to Expect After You File
After the IRS receives your form and documentation, the IRS service center will notify you whether or not your election is accepted. If they accept it, they’ll let you know when it takes effect.
Generally, the IRS aims to respond to these requests within 60 days. If the business doesn’t receive a notice of acceptance or rejection within two months, the IRS recommends following up directly with the IRS to ensure that the form was not lost.
During this wait period, continue to file your tax returns (Form 1120-S) and pay all required taxes as if your S-corp status had been approved. This demonstrates your consistent intent to be treated as an S-corporation and supports your claim of good faith.
When It’s Time to Talk to an Attorney
Although it is possible to request a late S-corp election on your own, you’ll likely find it much easier and less stressful when you work with a tax professional. Talking to a tax professional is recommended if:
- You’ve received conflicting IRS notices, and you’re not sure how to proceed.
- You’re past the three-year and 75-day window.
- Your business has undergone multiple business restructures, and you’re not sure how a late election may affect you.
- You don’t know how to request a late election and prove reasonable cause.
With the team at Wiggam Law, you can feel confident that your filed forms and timelines are accurate. We’ll communicate with the IRS on your behalf and draft a persuasive, reasonable cause statement that demonstrates your good faith efforts to comply with tax law. Our extensive experience with business tax law has allowed us to help many business owners in the exact same situation you’re now in.
Missing your S-corp election deadline may feel like a tax disaster, but there are ways to fix the situation. By requesting a late election, you may be able to protect your filing status and save money on taxes. Let’s talk more about your options – call us at 404-609-1300 or reach out online now.
Late S-Corp Election Relief FAQs
How do I know if my late election was accepted?
The IRS typically responds to these requests within 60 days. You’ll receive a notice in the mail notifying you that your request has been accepted and indicating when the election is effective.
What if it has been more than three years and 75 days?
You may still be able to request a late election; the law allows exceptions in limited circumstances. You should talk to a tax attorney about your options.
My CPA was supposed to file the election and didn’t. What now?
That may count as “reasonable cause” when you apply for a late election. Explain your situation and what happened in your reasonable cause statement.
Can the IRS deny late election requests?
Yes. They may deny your request if you don’t qualify for S corporation status or if you don’t provide enough evidence of reasonable cause.
Resources
https://www.irs.gov/pub/irs-drop/rp-13-30.pdf
https://www.irs.gov/forms-pubs/about-form-2553
https://www.law.cornell.edu/cfr/text/26/301.7701-3
https://www.law.cornell.edu/uscode/text/26/1361
https://www.irs.gov/businesses/small-businesses-self-employed/late-election-relief
https://www.irs.gov/pub/irs-pdf/f2553.pdf
https://www.irs.gov/instructions/i2553