IRS Grants Relief for Late S Corporation Tax Year Election Under § 301.9100-3

IRS Grants Late Election Relief for S Corporation’s Tax Year Change

The IRS granted late election relief to an S corporation seeking to change its tax year-end after missing the filing deadline for Form 1128, the application to adopt, change, or retain a tax year. Under Section 301.9100-3, which allows discretionary relief for missed regulatory elections when the taxpayer acted reasonably and in good faith, the IRS ruled that the corporation’s late filing—submitted within 90 days of the deadline—met the criteria for relief. This decision underscores the importance of timely professional guidance for S corporations navigating election deadlines, as the IRS emphasized the taxpayer’s lack of prejudice to government interests. The ruling, issued as a non-precedential private letter ruling, provides no broader legal authority but signals the IRS’s willingness to grant relief in cases of reasonable reliance and prompt corrective action.

The Taxpayer’s Request: A Late Election for Tax Year Change

The S corporation sought to change its tax year-end from Date 2 to Date 3, effective for Year 1. The change required filing Form 1128—the IRS form used to adopt, change, or retain a tax year—by the 15th day of the second month following the new tax year’s start. However, the taxpayer initially believed it was ineligible for the change after receiving advice from its primary tax adviser that the 25% gross receipts test under Section 4.01(2) of Rev. Proc. 2006-46 could not be met.

Following the missed deadline, the taxpayer consulted a different tax professional, who determined the corporation qualified for automatic consent under Rev. Proc. 2006-46, Section 4.01(2). The new adviser cited the 25% gross receipts test, which allows S corporations to adopt a fiscal year if at least 25% of gross receipts occur in the last two months of the proposed year. The taxpayer then filed Form 1128 on Date 1, within 10 days of the Year 1 filing deadline, under the mistaken belief that the original adviser’s assessment had been incorrect. The filing referenced Section 7.02(1) and (2) of Rev. Proc. 2006-46, which outline the procedures for late filings seeking relief under the automatic consent provisions.

The IRS’s Rationale: Reasonable Reliance and No Prejudice to Government

The IRS granted relief under § 301.9100-3, which permits extensions for late regulatory elections if the taxpayer demonstrates reasonable reliance and good faith and that granting relief would not prejudice the government’s interests. The agency found the taxpayer met both prongs of this test.

First, the taxpayer acted reasonably and in good faith by relying on professional advice. Under § 301.9100-3(b)(1)(i), a taxpayer is deemed to have acted reasonably if they request relief before the failure is discovered by the IRS. Here, the taxpayer filed Form 1128 within 10 days of the Year 1 deadline after receiving contrary advice from a second tax advisor, demonstrating prompt action upon discovering the error. Additionally, § 301.9100-3(b)(1)(v) permits relief where the taxpayer reasonably relied on a tax professional who failed to advise the election. The IRS concluded the taxpayer’s reliance on the initial adviser—who incorrectly opined on eligibility—was reasonable, as there was no evidence of incompetence or lack of awareness of relevant facts.

Second, the IRS determined that granting relief would not prejudice the government’s interests. Under § 301.9100-3(c)(1)(i), prejudice occurs if the election would result in a lower aggregate tax liability. The taxpayer’s change in tax year did not alter taxable income or liability; it merely adjusted the timing of income recognition. Further, § 301.9100-3(c)(3) deems prejudice unless the request is filed within 90 days of the original deadline. The taxpayer filed within 10 days, well before the 90-day safe harbor expired, and satisfied all regulatory requirements. The IRS also noted that no taxable years were closed by the statute of limitations, eliminating another potential prejudice under § 301.9100-3(c)(1)(ii). Thus, the agency concluded that granting relief would preserve government interests without altering tax revenue.

Key Takeaways: Implications for S Corporations and Tax Professionals

Tax professionals must recognize that regulatory elections—particularly tax year changes for S corporations—demand timely and accurate advice to avoid costly missteps. The IRS’s grant of relief in this PLR underscores that reasonable reliance on professional guidance, even if incorrect, may still qualify for relief under § 301.9100-3, which permits discretionary relief for late elections if the taxpayer acted in good faith and the government’s interests are not prejudiced. This provision is critical for S corporations that miss deadlines due to misinterpreted rules or administrative errors, as it provides a safety net—but only if the request is filed within the 90-day window specified in § 301.9100-3(c)(3). Taxpayers who file beyond this window face a presumption of prejudice, making timely action essential.

The case also highlights the non-precedential nature of PLRs, which bind only the requesting taxpayer. While this ruling offers reassurance for similarly situated S corporations, it does not establish binding authority for other taxpayers or IRS examiners. Professionals should therefore avoid treating PLRs as precedent and instead use them as guidance for structuring their own relief requests or proactively consulting the IRS for comparable issues. For S corporations navigating tax year changes, the lesson is clear: proactive planning, meticulous documentation of business purpose (e.g., the 25% gross receipts test under Rev. Proc. 2022-9), and immediate action upon discovering a missed election are the best defenses against compliance risks. Those facing uncertainty should consider requesting their own PLR to secure definitive relief before the 90-day safe harbor expires.

Procedural Note: Attaching the PLR to Tax Returns

To comply with IRS procedures, the taxpayer must attach a copy of this PLR to any income tax return to which it applies. Electronic filers may satisfy this requirement by including a statement on the return that provides the date and control number of the letter ruling. The IRS reserves the right to verify the facts, representations, and data submitted in support of the ruling during an examination. Taxpayers should note that this ruling is issued solely to the requesting party and cannot be used or cited as precedent under Section 6110(k)(3) of the Code.