Form 2553 Late Election Relief [+ Reasonable Cause Examples]

The IRS requires form 2553 to be timely filed. But what if you are late? Fortunately, the IRS provides Form 2553 late election relief based on reasonable cause.

But what is reasonable cause and how does it work? In this guide, we will discuss late elections and give you a few reasonable cause examples. Let’s dive in!

Background

The deadline for filing form 2553 for a new business is tight. It must be filed within two months and fifteen days of the date of formation.

However, if the new business was formed on November 15th, 2020, you must file form 2553 before January 29th, 2021. If you are unable to timely file form 2553, you must prove that you had reasonable cause.

You can also provide documents proving that all of the shareholders have reported income in a way that is consistent with the corporation’s intent to file as an S corporation.

Requesting Relief for A Late Election

So what if you missed the deadline to make the election? What if you didn’t even know there was a deadline?

Fortunately, the IRS knows that taxpayers make mistakes. As such, they offer a few ways to correct the mistake. They will fall into the following categories:

• Request relief based on “reasonable cause.”
• Make the election for the subsequent tax year.
• Request relief using one of the IRS Revenue Procedures.

There are pros and cons of the above options. So ensure that you carefully consider each.

Request late election relief for reasonable cause

Reasonable cause is when a taxpayer didn’t file the forms on time due to a “valid reason.” In most situations, the IRS is generous when granting late relief for reasonable cause. 

Reasonable cause is a rather subject area, and the IRS does not publish valid reasons. There is no list of reasonable cause exceptions. But there have been many court cases and other IRS disclosures that have clarified the issue. 

Reasonable cause is a concept based on all the related facts and circumstances in your specific situation. They will consider any reason that shows you used all ordinary and necessary care and prudence to comply with your tax compliance but were nevertheless unable to do so.

As a general rule, the IRS has granted waivers under the following circumstances:

• The company’s president or similar responsible party inadvertently neglected to file the election. In addition, the company’s CPA mistakenly failed to do so.
• The corporation’s shareholders were either unaware that they needed to file the election or were unaware of a filing deadline.
• The company acted as though it was an S-Corp during this time frame.

When requesting relief for reasonable cause, the following following points should be considered: 

• What situation resulted in the late filing and when did it occur?
• How did the specific circumstances result in the 2553 not being timely filed?
• How were the other financial and tax affairs handled in this time period? Did the company operate as an S-Corp or delay personal tax returns because they intended to be an S-Corp?
• Once the company realized the error, what did they do to correct the situation? Did they take immediate action?

Typical IRS Reasonable Cause Examples

The IRS will generally consider any reasonable situation. You must show them that you indended to be an S-Corp and acted as if you were an S-Corp. Once you uncovered the mistake, you did everything in your power to correct the issue. Valid reasons could include:

• Fire, natural disaster, casualty, or other disturbances.
• Inability to obtain financial or administrative records or files.
• Death, serious injury, incapacitation, illness or unavoidable absence of the company officer or a member of the officer’s immediate family.
• Any other reason that establishes that the company used all ordinary and necessary business prudence and diligence to meet the IRS filing requirements, but were unable to do so.

Why should you consider an S-Corp?

In order to become an S-Corp, you must first obtain a unique company name and set up an LLC or a corporation at the state level. You can check if a name is already registered with your state’s business office.

An S-Corp also must have a board of directors, which represents shareholders. Directors must hold regular meetings and keep minutes of their meetings. They also develop policies that govern the company.

In addition to limiting the number of shareholders, an S-Corp can’t go public or raise money from new investors. Shareholders must be U.S. citizens or US-resident entities. Private equity funds and venture capital firms aren’t eligible as owners. An S-Corp can have one class of stock, while a C-Corp can have several classes.

One benefit of an S-Corp is that it is not subject to federal income tax. This is known as pass-through taxation, and it means that your company pays tax only on the income from shareholders. Basically, you can save money by paying taxes on your personal income, while avoiding double taxation. If you’re wondering what an S-Corp is, here are some important facts. You’ll be glad you did.

Bottom line

While most small businesses benefit from the default LLC status, if you are planning to incorporate, you should consider filing form 2553. This tax form is used to make a business a pass-through entity.

It allows the earnings of the company to pass through to the owners and other shareholders, who then pay taxes on those earnings at the individual income tax rate. Although filing form 2553 on time is crucial, there is a late S corporation election option.