rate level without issuing notices of deficiency.34
CONCluSION
the cumbersome S corporation election procedures unduly burden small businesses and waste valuable irS resources in resolving unpostable S corporation accounts where the income has most likely already been reported on the shareholders’ individual returns. the irS should refocus its efforts and assist small business owners who are trying to elect S corporation status by simplifying the late election relief process and updating publications and the irS website with the simplified procedures.
in conclusion, the National taxpayer advocate offers these preliminary recommendations: consolidate the five revenue procedures providing relief for late S corporation elec- 1.
tions into one.
include a simple guide to the relief process in letters to taxpayers that did not make a 2.
timely election.
publish guidance providing retroactive relief where reasonable cause exists for the 3.
failure to make a timely S corporation election at any time without the need to request a letter ruling and delegate authority to provide reasonable cause relief. the guidance should provide examples of what constitutes reasonable cause.
enhance systems to allow electronic filing of Form 2553 at any time during the tax 4.
year, up to and including with the first S corporation return filing.
Update publications, forms, correspondence, and the irS website with instructions for 5.
making the S election and how to seek relief to correct late elections.
develop an administrative appeal process for taxpayers whose elections are denied. 6.
identify and correct old conversion cases where the irS assessed tax without issuing 7.
a statutory notice of deficiency or denied effective elections because of lost returns or other errors.
IRS COMMeNTS
as part of congress’ enactment of Subchapter S in 1958, qualified businesses are allowed the option of electing tax treatment as an S corporation. the benefits allowed to S corpora- tions include avoidance of double taxation, as can be the case with c corporations, while preserving the limited liability features that can be lost in the case of some partnerships.
34 A review of 318 of 2,332 TAS cases involving S corporation election issues uncovered 32 (approximately ten percent) accounts where tax was assessed
without a statutory notice of deficiency for tax years prior to 2003. Cases were selected from the Taxpayer Advocate Management Information System (TAMIS) using issue code 440 for the period June 1, 2006, through September 30, 2010. Cases were selected for review based on a convenience sample.
the irS continues to attempt to ease taxpayer burden and appreciates the National taxpayer advocate’s analysis of the S corporation election process, its impact on small busi- ness taxpayers, and recognition of the valuable irS resources dedicated to resolving related discrepancies.
chief counsel passthroughs and Special industries (cc:pSi) has included an item in their 2009-2010 priority Guidance plan entitled “Guidance under § 1362” which will carry over to the 2010-2011 priority Guidance plan. this project will look at superseding most or all of the existing relief revenue procedures and combining them into a single source which will facilitate taxpayer understanding.
as noted in the National taxpayer advocate’s report, the irS has taken several steps to educate taxpayers regarding the S corporation election process. For example:
When taxpayers apply for an eiN and indicate the new entity is a corporation or S ■
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corporation, they receive an eiN confirmation notice35 which includes text entitled
“important information for S corporation election.”
When taxpayers apply for eiNs for S corporations using the Modernized internet ■
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eiN application, they are presented with several pages of instructions concerning the requirements for making an S corporation election.
instructions for Form 255 ■
■ 3, Election by a Small Business Corporation, page 2, includes guidance on the late election relief provisions.
letter 3853 is issued to taxpayers who file an S corporation with no election in effect to ■
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notify the taxpayers of late election relief provisions.
Using the search term “S corporation” on www.irs.gov results in a top link to “S corpo- ■
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rations.” this leads to the website which defines S corporations, explains the require- ments to elect S corporation status, and states the requirement to submit Form 2553 signed by all the shareholders.
Since tax year 2007, the Form 1120S warns taxpayers not to file this form unless the ■
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corporation has filed or is attaching Form 2553 to elect to be an S corporation. it also reiterates this requirement on a line G by asking for the Form 2553 to be attached if this is the first year of S corporation status, if it was not already filed.
From 1993 through 2006, Form 1120S stated not to file this form unless the corpora- ■
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tion has filed Form 2553 to elect to be an S corporation.
the Form 1120S instructions discuss the need to have an accepted election in effect ■
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and references Form 2553 and related instructions.
the National taxpayer advocate’s report indicates that in the past, it has been difficult to prove the existence of timely filed S corporation returns. as the report recognizes, the irS processes have improved as we now have the ability to capture rejected returns in Master File.