In my career, I have received calls from panicked tax professionals who have discovered that they have inadvertently missed a tax election and don’t know what to do. When I receive such a call, I tell the caller two things. First, I tell the tax professional to contact his or her malpractice carrier. Second, I tell the caller that there may be a solution, Reg. Sections 301.9100-1 thru 3, which contain rules for allowing for extensions of time for late tax elections. Depending on the circumstances, Section 9100 relief may be automatic or non-automatic.
The rules and requirements for automatic relief are set forth in Reg. Sec. 301.9100-2, which includes two types of automatic extensions, 12-month extensions and 6-month extensions.
The following regulatory elections are eligible for the automatic 12-month extension:
- The election to use other than the required taxable year under Section 444;
- The election to use the LIFO inventory method under Section 472;
- The 15-month rule for filing an exemption application for a Section 501(c)(9), 501(c)(17) or 501(c)(20) organization under Section 505;
- The 15-month rule for filing an exemption application for a Section 501(c)(3) organization under Section 508;
- The election to be treated as a homeowners organization under Section 528;
- The election to adjust basis on partnership transfers and distributions under Section 754;
- The estate tax election to specially value qualified real property (where the IRS has not yet begun an examination of the filed tax return) under Section 2032A(d)(1);
- The chapter 14 gift tax election to treat a qualified payment right as other than a qualified payment under Section 2701(c)(3)(C)(i); and
- The chapter 14 gift tax election to treat any distribution right as a qualified payment under Section 2701(c)(3)(C)(ii).
An automatic extension of 6 months from the due date of a tax return excluding extensions is granted to make regulatory or statutory elections whose due dates are the due date of the return or the due date of the return including extensions provided the taxpayer timely filed its return for the year the election should have been made and the taxpayer takes corrective action within the 6-month extension period. The automatic 6-month extension does not apply to regulatory or statutory elections that must be made by the due date of the return excluding extensions. Corrective actions means taking the steps required to file the election in accordance with the statue or the regulation published in the Federal Register, or the revenue ruling, revenue procedure, notice or announcement published in the Internal Revenue Bulletin.
The procedures for obtaining an automatic extension are fairly straightforward. Any return, statement of election, or other form of filing that must be made to obtain an automatic extension must be sent to the same address that the filing to make the election would have been sent had the filing been timely made. In addition, any filing made to obtain the automatic extension should state at the top of the document that it is “FILED PURSUANT TO SECTION 301.9100-2”. Because a request for automatic extension does not require a letter ruling, there is no user fee.
The rules and requirements for non-automatic extensions are set forth in Reg. Sec. 301.9100-3. Non-automatic relief applies only to elections where the due dates are set by regulation, not by statute and are granted on a case-by-case basis. In order to receive relief, it must be shown that the taxpayer acted reasonably and in good faith and that granting relief will not prejudice the interests of the government.
A taxpayer is deemed to have acted reasonably and in good faith if the taxpayer:
- Requests relief before the IRS discovers the failure to make the election:
- Failed to make the election because of intervening events beyond the taxpayer’s control;
- Failed to make the election because after exercising reasonable diligence (taking into account the taxpayer’s experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for the election;
- Reasonably relied on the written advice of the IRS; or
- Reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election.
A taxpayer is deemed not to have acted reasonably or in good faith if the taxpayer:
- Seeks to alter a return position for which an accuracy related penalty has been or could be imposed at the time the taxpayer requests relief, (taking into account any qualified amended returns filed), and the new position requires or permits a regulatory election for which relief is requested;
- Was informed in all material respects of the required election and related tax consequences, but chose not to file the election; or
- Uses hindsight in requesting relief, ie, specific facts have changed since the due date for making the election that make the election advantageous to the taxpayer.
A request for relief will be deemed to prejudice the interest of the government if:
- Granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made. If the tax conse-quences of more than one taxpayer are affected by the election the government’s interests are prejudiced if extending the time for making the election may result in the affected taxpayers, in the aggregate, having a lower tax liability than if the election had been timely made.
- The taxable year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the statute of limitations for assessment before the taxpayer’s receipt of a ruling granting relief. The IRS may condition a grant of relief on the taxpayer providing the IRS with a statement from an independent auditor certifying that the interests of the government are not prejudiced.
Taxpayers requesting and receiving non-automatic relief must waive all objections to a second examination of the issues and corresponding adjustments affected by the relief. In addition, because requesting non-automatic relief does not suspend the statute of limitation on assessment, the IRS may condition a grant of relief on the taxpayer consenting to extend the period for the year the taxpayer should have made the election and any other years affected by the election.
In order to obtaining a non-automatic extension, the taxpayer or taxpayer’s representative must submit a detailed affidavit, dated and signed under penalty of perjury, describing the events and circumstances surrounding the failure to timely make the election and the failure’s discovery. If the taxpayer relied on a tax professional for advice, the taxpayer’s affidavit must describe the engagement and responsibilities of the professional as well as the extent to which the taxpayer relied on the professional. The taxpayer may also include affidavits, dated and signed under penalty of perjury, from the tax return preparer, any other individual who substantially participated in preparing the return, or from any tax professional from whom the taxpayer sought advice regarding the election.
Requests for non-automatic relief must follow the procedures for requesting a private letter ruling (PLR), including paying a user fee. The procedures for requesting a letter ruling are described in the first revenue procedure each year, (Rev. Proc. 2015-1), which includes an appendices to assist with the request for a letter ruling. The appendices generally includes a sample letter request, checklist, address for submission and the user fee.