Late election relief under Rev. Procs. 97-48 and 98-55.

• Author: Howell, R. Milton
• Position: IRS Revenue Procedures concerning S corporation elections

Currently, Rev. Procs. 97-48's and 98-55's automatic change provisions cover seven types of late S election problems. Relief is also possible under Sec. 1362(f); however, this analysis discusses avenues available only under Rev. Procs. 97-48 and 98-55, which offer limited filing relief without a user fee.

Rev. Proc. 97-48

While Rev. Proc. 97-48 is limited, it is the only current route for automatic approval of a late S election. Section 4.01 addresses situations in which the sole reason for a late S election is failure to file Form 2553, Election by a Small Business Corporation (under section 1362 of the Internal Revenue Code). This frequently occurs when the taxpayer, accountant and attorney each thought that someone else was preparing the form. To qualify for relief under section 4.01, a corporation and its shareholders must have reported their income consistent with a valid S election for the initial year in question and all subsequent years. If the IRS failed to notify either the corporation or any of the shareholders of a problem within six months of the initial S return filing, automatic approval is available.

Section 4.02 provides for automatic approval when a taxpayer intended to become an S corporation for a year beginning before 1997 and did not timely file Form 2553. This fact pattern, however, is somewhat dated for today's needs. In this case, the Service would accept an S status change, but only prospectively the following tax year. A further condition states that a taxpayer must file a C corporation return for this period, then begin filing as an S corporation in the following tax year. All shareholders must have filed in accordance with this status for each year, and the oldest year must be open under the statute of limitations. If the corporation and all shareholders agree to amend the year(s) covered by the last C corporation filing, automatic relief is available.

Rev. Proc. 98-55

Rev. Proc. 98-55 supersedes Rev. Procs. 94-23 and 97-40, and is the general rule for late S election relief without a letter ruling. Unlike Rev. Proc. 97-48, relief is not automatic, but is based on the IRS's acceptance of a reasonable cause for the late election. Section 4.01 provides that, if the failure to file...