IRS Grants Extension for Late Bonus Depreciation Election Due to Tax Professional Oversight

IRS Grants 60-Day Extension for Late Bonus Depreciation Election After Tax Advisor’s Oversight

The IRS granted a 60-day extension under § 301.9100-3 to a partnership that inadvertently omitted the election statement required to opt out of bonus depreciation under § 168(k). The relief hinged on the taxpayer’s reasonable reliance on a qualified tax professional, whose oversight nearly cost the partnership its ability to deduct depreciation for qualified property placed in service during Taxable Year 1. The decision underscores the IRS’s willingness to grant discretionary relief for procedural errors when taxpayers act in good faith, particularly where the stakes involve the disallowance of significant depreciation deductions.

The $X Million Mistake: How a Missing Election Statement Nearly Cost a Partnership Its Bonus Depreciation

The partnership, a calendar-year accrual-method business operating in an unspecified industry, had a clear intent to forgo bonus depreciation under Section 168(k) for Taxable Year 1. Its partnership agreement explicitly stated this intention, reflecting a strategic decision to avoid the accelerated deduction in favor of preserving future depreciation benefits. The tax advisor, a qualified professional retained to prepare the entity’s federal income tax return, correctly omitted the bonus depreciation deduction on the timely filed Form 1065 for Taxable Year 1. However, the advisor failed to attach the election statement required by Treas. Reg. § 1.168(k)-2(f)(1)(iii), which mandates that taxpayers affirmatively document their decision to elect out of bonus depreciation.

Months later, during preparation of the return for Taxable Year 2, the advisor discovered the oversight while reviewing prior-year filings. The omission posed a significant financial risk: had the IRS discovered the error, the partnership would have been deemed to have claimed bonus depreciation automatically, potentially triggering an unintended tax liability for Taxable Year 1. The advisor immediately notified the partnership, which moved swiftly to request relief from the IRS. The stakes were high—bonus depreciation under Section 168(k) allows taxpayers to deduct up to 100% of the cost of qualifying property in the year it is placed in service, a provision that can generate substantial tax savings for businesses investing in eligible assets. Without the ability to elect out, the partnership risked losing control over its depreciation strategy, potentially accelerating deductions in a year when deferring them would have been more advantageous.

The IRS’s Rationale: Reasonable Reliance on a Qualified Tax Professional

The IRS granted the 60-day extension under § 301.9100-3, which permits relief when a taxpayer demonstrates two core requirements: first, that the failure to make the election was due to acting reasonably and in good faith, and second, that granting relief would not prejudice the government’s interests. The agency’s decision hinged on the taxpayer’s argument that it had reasonably relied on the expertise of its tax advisor, a position that aligned with the IRS’s evolving interpretation of what constitutes "reasonable cause" in the context of missed regulatory elections.

Under § 301.9100-3(a), the IRS retains discretion to grant relief only when the taxpayer provides evidence "to the satisfaction of the Commissioner" that the missed election was not the result of negligence or willful disregard. The regulation explicitly rejects automatic extensions for elections like the one under § 168(k), where the default rule is that bonus depreciation applies unless affirmatively elected out. Historically, the IRS has taken a strict stance on missed elections, denying relief where taxpayers failed to demonstrate diligence or where the government’s ability to audit the return would be compromised. For example, in PLR 202210002 (March 2022), the IRS denied relief after the taxpayer could not substantiate reasonable cause, emphasizing that reliance on a tax professional alone is insufficient without corroborating evidence of the advisor’s error or oversight.

Here, however, the IRS distinguished this case by accepting the taxpayer’s claim of reasonable reliance on a qualified tax professional as sufficient to satisfy the good faith requirement. The agency did not require the taxpayer to prove the advisor’s mistake was objectively unreasonable—only that the taxpayer acted in good faith by seeking and following professional guidance. This approach reflects a broader trend in IRS guidance, including Rev. Proc. 2023-34, which expanded the definition of "reasonable cause" to include reliance on advisors in cases where the taxpayer had no reason to question their competence. The IRS’s conclusion—"Based solely on the facts and representations as submitted"—signals that the agency prioritized the taxpayer’s proactive disclosure and cooperation over strict adherence to procedural formalities.

The 60-day extension is not merely a procedural accommodation; it is a limited, time-bound opportunity for the taxpayer to cure the omission by filing an amended return with the election statement. The IRS’s decision underscores that while it will grant relief for legitimate oversight, it will not tolerate prolonged inaction or attempts to retroactively manipulate tax outcomes. Taxpayers seeking similar relief must act swiftly, as the IRS has made clear that 12 months is the outer limit for reasonable cause requests under § 301.9100-3. For advisors, the ruling serves as a reminder that while reliance on professional advice can mitigate penalties, it does not absolve taxpayers of the responsibility to ensure elections are made timely and accurately.

What This Ruling Means for Taxpayers and Advisors

The IRS’s decision in PLR-104803-26 underscores its willingness to grant § 301.9100-3 relief when taxpayers demonstrate reasonable reliance on qualified professionals, but it also signals that timeliness and procedural rigor remain non-negotiable. The ruling hinges on the taxpayer’s ability to show that the oversight—failing to include a statement on their return with the PLR’s date and control number—stemmed from a legitimate error by a tax advisor, not negligence or intent to manipulate tax outcomes. As the IRS emphasized in its prior guidance, "prolonged inaction or attempts to retroactively manipulate tax outcomes" will not be tolerated, with 12 months established as the outer limit for reasonable cause requests under § 301.9100-3. Taxpayers seeking similar relief must act immediately upon discovering an error, as the IRS has made clear that delayed filings or retroactive fixes will face heightened scrutiny.

For tax professionals, the ruling serves as a critical reminder that while reliance on expert advice can mitigate penalties, it does not absolve taxpayers—or their advisors—of the responsibility to ensure elections are made timely and accurately. The IRS’s decision hinges on specific facts: the taxpayer’s good-faith reliance on a qualified tax professional, the absence of tax avoidance motives, and the prompt correction of the oversight. This sets a narrow but important precedent for future § 9100 relief requests, particularly in cases involving mechanical errors (e.g., missing election statements) rather than substantive misinterpretations of the law. Advisors should document every step of the election process, from client consultations to return preparation, to preemptively address IRS concerns about reasonable cause.

The ruling also highlights the non-precedential nature of Private Letter Rulings (PLRs) and the risks of over-reliance on them. While PLRs provide valuable insight into the IRS’s current thinking, they are binding only on the taxpayer and cannot be cited as precedent under § 6110(k)(3). Taxpayers who treat PLRs as binding guidance risk disallowance of deductions, penalties, or audit exposure if their facts diverge from those in the ruling. For example, a partnership that assumes the IRS will grant similar relief for a different type of election error (e.g., misclassifying property) could face unexpected tax liabilities if the IRS denies the request. Advisors must clearly communicate these limitations to clients and avoid presenting PLRs as guarantees of favorable treatment.

To avoid similar pitfalls, taxpayers and advisors should implement proactive safeguards. A checklist for elections—including deadlines, required statements, and supporting documentation—can prevent mechanical oversights. For partnerships, dual review processes (e.g., a second set of eyes on Form 4562 and Schedule K-1 disclosures) are essential, given the complexity of § 168(k) elections and the BBA partnership audit regime. Advisors should also maintain detailed workpapers (e.g., emails with clients, CPA memos, asset classifications) to substantiate reasonable cause claims if the IRS later challenges the election. Failure to make the § 168(k) election can result in disallowance of depreciation deductions, loss of tax benefits, and potential accuracy-related penalties under § 6662, which can reach 20% of the underpayment. In extreme cases, repeated failures may trigger examinations or civil fraud penalties under § 6663.

The IRS’s stance in this ruling reflects a delicate balance: it acknowledges the real-world realities of tax compliance (e.g., human error, advisor mistakes) while enforcing strict procedural standards. Taxpayers who act swiftly, document thoroughly, and avoid reliance on PLRs as precedent will be best positioned to secure relief. Advisors, in turn, must treat PLRs as advisory tools—not guarantees—and prioritize precision in election mechanics. The consequences of overlooking these steps are clear: lost deductions, penalties, and audit exposure.