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Probably the most common reason for failed S elections is the failure to file the required Form 2553 in a timely manner.  In order to satisfy this requirement, the form must be filed within two month and fifteen days from the first day of the taxable year of the corporation for which the election is intended to be effective.  In order to provide relief from a failure to satisfy this requirement in appropriate circumstances, Section 1362-5 of the Internal Revenue Code allows the Secretary of the Treasury to treat a late filed election as timely filed if he determines that there was reasonable cause for the failure.

In recent years the Internal Revenue Service has provided several methods for obtaining relief for corporations or eligible entities[1] that failed to file timely S elections or failed to meet all of the requirements set forth in Section 1362 of the Internal Revenue Code.[2]  Recently the Service has added an additional method for corporations that meet the requirements set forth in Rev. Proc. 2007-62 to obtain relief from its failure to make a timely election.  In order to qualify for relief under this revenue procedure, the following requirements must be satisfied:

(1)  The failure to qualify for S status is solely because of the failure of the corporation to file a timely Form 2553;  

(2)  The corporation has reasonable cause for its failure to file a timely election;

(3)  The corporation has not filed a tax return for the taxable year for which the election was intended;

(4)  The application for relief under Rev. Proc. 2006-62 is filed no later than 6 months after the due date of the tax return (excluding extensions) of the corporation for the first taxable year for which the election was intended; and

(5)  No taxpayer whose tax liability or tax return would be affected by the S election (including all shareholders of the corporation) has reported inconsistently with the S corporation election on any affected return for the year for which the S corporation election was intended.

In order to avail itself of this procedure, the corporation must file a properly completed Form 2553 with the appropriate campus[3] with a Form 1120S for the first taxable year the corporation intended to be taxed as an S corporation within the time limit set forth above.  The Form 2553 must be modified to contain a statement establishing reasonable cause for the failure to file a timely election.

Published letter rulings, suggest that the Service is generally accommodating in determining reasonable cause where the remaining requirements have been met.

To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding U.S. tax penalties.

[1]   Under Treas. Reg. §301.7701-3(a), a U.S. entity other than a corporation or joint stock company having two or more members is an “eligible entity” that may elect to be taxed as either a corporation or a partnership.  Under Treas. Reg. §301.7701-3(b) an eligible entity that does not elect to be taxed as a corporation will be taxed as a partnership.  An eligible entity that satisfies the requirements of Rev. Proc. 2007-62 will be treated as an S corporation for federal income tax purposes.  As used in this comment, the term corporation includes an eligible entity that has already elected to be a corporation or that makes the filing described in Rev. Proc. 2007-62.

[2]  See Announcement 97-4, 1997-3 I.R.B. 14; Rev. Proc. 97-48, 1997-2 C.B. 521; Rev. Proc. 2003-43, 2003-1 C.B. 998; Rev. Proc. 2004-49, 2003-33 I.R.B. 10; and Rev. Proc. 2004-48, 2004-32 I.R.B. 172.

[3]  Formerly  “service center.”