United States

Pending S corp guidance may provide relief for common "foot faults"

TAX ALERT  | 

An official from the IRS recently confirmed that the IRS plans to provide guidance that S corporations can use, in lieu of the expensive and time consuming private letter ruling process, to gain assurance that certain foot faults won’t jeopardize a company’s subchapter S status.

S corporations, while much simpler than other pass-through entities, come with a set of strict requirements that they must meet in order to retain their tax status. For the unwary or inattentive, these requirements can be easy to violate, which can prove fatal to the corporation’s S election. However, in many cases these foot faults are inadvertent, and the IRS routinely grants relief for inadvertent terminations through a Private Letter Ruling (PLR). Unfortunately, these letter rulings are often expensive for the taxpayer, and time consuming for the IRS – turning what may be a small misstep into a major relief effort, in both dollars and time for the taxpayer and the IRS.

Speaking at recent Practicing Law Institute (PLI) conference in New York City, Clifford Warren, senior counsel to the Internal Revenue Service's associate chief counsel, (passthroughs and special industries) stated that the IRS is looking to help taxpayers address these issues without the need to come in for a formal letter ruling.

To that end, Warren said the IRS plans to issue guidance (possibly in the form of a revenue procedure) that would provide relief for some of the faults S corporations commonly make, and for which the IRS commonly grants relief. Warren said this guidance is in process, but the timing of its release is still unknown. Accordingly, taxpayers currently considering filing a ruling request may find it prudent, if possible, to wait until the IRS releases its guidance in order to potentially save time and money associated with the PLR request.

For additional information regarding IRS letter rulings for certain S corporation requirements, see our prior alert IRS signals change to S corporation ruling policy.

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