What do I do if IRS won’t let us be an S corporation for a prior year?

WHAT IF YOU CANNOT FILE S CORPORATION TAX RETURN FOR A PRIOR YEAR? By Jeffrey Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC, a Professional CPA and CFP Firm jeff@jbrookswa.com 602-292-2009 Please consult with your professional tax CPA regarding your specific circumstances!

We are a Phoenix CPA firm specializing in tax savings for business owners.

My experience as a CPA since 1976 is that most business owners do not understand the difference between filing as a C corporation or an S corporation.

So, when a letter is received from the IRS that states that the election to file as an S corporation was for 2013 but not for 2012, business owners rightfully become upset because losses from 2012 will be disallowed.

S corporation losses are allowed to be used at the individual Form 1040 level, while C corporation losses are stuck in the corporation.

The IRS requires the business owner to amend 1120S S corporation showing no activity, amend personal tax returns and file late C corporation tax forms 1120 as a C corporation for 2012 instead of form 1120S as an S corporation that was filed.

The IRS will say in the letter of disallowance of filing S corporation for 2012:
Dear Taxpayer:
We received your Form(s) 1120S for the tax periods listed above (2012). But we can’t process your Forms as filed.
The IRS will then explain that the S corporation election was not effective until the following year (2013) but that if you qualify for relief, then you should send the following information to the service center where you filed the Form 2553.
The IRS letter than says that you should send in:

1. A properly completed Form 2553 with the words “Filed Pursuant to Rev. Proc 2013-30” written on the top of the form
2. A statement explaining your reasonable cause for failing to file the Form 2553 by the original due date of the election.
3. A statement from all shareholders that during the period between the date the S corporation election was to have become effective and the date you filed the completed election, they reported their incomes on all affected returns, consistent with the S corporation election for the year the election should have been made and for all subse4quent years.
4. A dated declaration signed by an officer of the corporation authorized to sign that says: “under penalties of perjury, I declare that, to the best of my knowledge and belief, the facts presented in support of this election are true, correct and complete.”
The IRS letter goes on to say: If you don’t qualify for relief under Rev. Procedure 2013-30, you can apply to the Chief Counsel for a Private Letter Ruling (PLR).
What the IRS letter does NOT tell you is that in most cases the IRS granted S corporation election in the next year (2013) which means that the instructions given by IRS above will end up failing to allow you to be an S corporation for 2012.

The letter than goes on to state that the shareholders in the corporation will need to amend their prior year returns when they thought they were a shareholder in an S corporation because they were really C Corporation shareholders and should not have picked up any loss or income on their personal returns.
FORTUNATELY THERE IS A SOLUTION DUE TO THE THREE YEAR AND 75 DAY RULE!

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com