INCOMPLETED FORM 2553 NOTICE on 2008 return

[rich]

Client filed 2008 tax as S- Corp in 2008 but got IRS notice in Dec 2009 that theres no record for form 2553 and Client has no proof like mailing receipts etc. Notice also says 1120-S form will be converted into 1120 if no reply is received within 30 days, which is already over.

Is it ok to file Form 1120 for 2009 with new 2553,at least for next year, 2010? Is there any need to amend 2008 from 1120 to 1120-S?

I will appreciate any advice and Thanks in advance.

Rich

[kcjenkins]

It's possible to get the 2553 accepted for 2008 and 2009, if they in fact did file everything on their personal return as if it were a Sub S. I'd sure try, before amending and then being stuck with it being a C corp converted to an S, with AAA and all attendant amendments of the personal returns.

In Revenue Procedure 2009-41 the IRS replaced the automatic procedures in Revenue Procedure 2002-59. Now qualified entities will be able to apply for late relief for up to 3 years and 75 days after which the entity had intended for the entity classification to take place.

To qualify for relief, an entity must meet the following requirements:

The entity failed to obtain the classification solely due to the failure to timely file the Form 8832 (either upon initial formation, the time when the entity’s classification became relevant or when the entity intended to request a change of classification) and

Either the entity has not yet filed a tax return for the first year the classification would take effect because the due date has not yet passed for the return or the entity has filed returns consistent with its requested classification for each year since the intended effective date. If the entity is not required to file a tax return (for instance, as a disregarded entity) each affected person must have filed its return consistent with the requested entity and

The entity has reasonable cause for the failure to timely make the election and

3 years and 75 days from the requested effective date of the eligible entity’s classification have not yet passed.

The taxpayer must comply with the required procedures found in Section 4.03 of the Revenue Procedure. That includes filing a Form 8832 with the notation that it is filed pursuant to this Revenue Procedure and a declaration signed under penalties of perjury. Entities that do not meet the requirements of this Revenue Procedure will be required to file a request for a private letter ruling and pay the applicable user fee.

The ruling takes effect on September 28, 2009

Also read Rev Proc 2003-43.

[rich]

Thanks KC

[jainen]

>> theres no record for form 2553 <<

In my opinion, one should not skip over the matter of reasonable cause. Although the IRS has been tolerant of late elections, it is best to give them something to agree to, besides that the corporate officers just forgot to do it. I think you should insist the clients try to find SOME proof of the intention to file, such as a copy of the 2553 as signed and dated (bonus points if it's not on the Dec 2007 revision), memo or phone log from when it was being discussed, board minutes--whatever. And make a reasonable effort to explain why they didn't follow through with filing the form.

In my further opinion, an important factor that is not shown in the official requirements is to demonstrate with affirmative facts that the decision to be a S-corp was NOT made later, after the business loss was known.

[rich]

Thanks Jainen, KC. Looks like 2553 was never sent with 2008 1120-S.Probably try to get releif as IRS didnt sent notice within 6 months of tax due date.There was no loss in 2008 but gain of $48000,Does it make any difference that there was no fraudulent intention for late conversion?

[kcjenkins]

It is actually entirely possible that the 2553 was mailed in and then lost by either the PO or the IRS. These things do happen. Given the fact that the return was filed, there was no questionable advantage, given that there was no loss to be passed through, I think the late approval is an almost certain thing.

I'd say it was a slam dunk, except that with the IRS nothing is ever certain.

[Lion EA]

Doesn't one of the IRS late procedures even mention previous returns filed as an S being accepted by the IRS as filed? Use that procedure to make your case.