A Missed Tax Election: Section 9100 Relief Gives a Second Chance

It’s a common scenario: A taxpayer misses the deadline to file an election with the IRS. What options does the taxpayer have now?  I have helped many clients out of this jam, and it is a situation that often presents several options for a tax professional who knows how to navigate the tax administration system—though sometimes it requires quick, diligent action.

We will focus on one particular route today: So-called “Section 9100” relief.  Section 9100 provides an opportunity to make a missed regulatory election.[1]

Section 9100 grants the IRS Commissioner authority to allow a reasonable extension of time for a taxpayer to make an election or file an application for tax relief.[2] Treasury regulations work out the details.[3]

What Is a Tax Election?

An election is an application for tax relief or a request to adopt, change, or retain an accounting method or accounting period.[4] An election, for these purposes, does not include an application for a mere extension of the time to file a return.[5]

Forms of Section 9100 Relief

There are two general types of elections: regulatory and statutory elections. A regulatory election is governed by a regulation or a revenue ruling, procedure, notice, or announcement.[6] A statutory election, on the other hand, is set by statute.[7] General relief comes in two forms: Automatic Relief under Section 9100-2 and Non-Automatic Relief under Section 9100-3.

Automatic Section 9100 Relief

Section 9100-2 provides for both an automatic 12-month and 6-month extension where a taxpayer qualifies.[8] In both cases, a taxpayer is required to take prescribed corrective action in accordance with the governing regulations. Corrective action requires that a taxpayer take the steps outlined in a statute or regulation, a revenue ruling, revenue procedure, notice, or Internal Revenue Bulletin announcement.[9] For example, if an election requires that an individual file a return, corrective action would require that the taxpayer include an original or amended return for the year in question in order to make an effective election.

Section 9100-2(a) provides for an automatic 12-month extension if the taxpayer takes corrective action within the 12-month period.[10] A taxpayer may obtain the extension window even if the taxpayer failed to file the return for the year in question in a timely manner.[11]

The types of elections eligible include the following, if other requirements are met:

(i) The election to use other than the required  taxable year under section 444;

(ii) The election to use the last-in, first-out (LIFO) inventory method under section 472;

(iii) 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;

(iv) The 15-month rule for filing an exemption application for a section 501(c)(3) organization under section 508;

(v) The election to be treated as a homeowners association under section 528;

(vi) The election to adjust basis on  partnership transfers and distributions under section 754;

(vii) The estate tax election to specially value qualified real property (where the Internal Revenue Service (IRS) has not yet begun an examination of the filed return) under section 2032A(d)(1);

(viii) 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

(ix) The chapter 14 gift tax election to treat any distribution right as a qualified payment under section 2701(c)(3)(C)(ii).

Alternatively, Section 9100-2(b) allows for a 6-month extension.[12] This deadline is six months from a tax return’s due date excluding extensions.[13] Such extensions are granted to make regulatory or statutory elections whose due date is the due date of the return or the due date of the return including extensions, presuming the taxpayer timely filed a return for the year in which an election is necessary and the taxpayer took corrective action.[14] A 6-month extension is not available if the regulatory or statutory return is required by the due date of the return, excluding extensions.[15]

Nonautomatic Relief Under Section 9100-3

If the request for election does not satisfy the requirements of Section 9100-2, relief may nonetheless be available under Section 9100-3. A request under Section 9100-3 will be granted if the taxpayer provides the evidence to establish that the taxpayer acted reasonably and in good faith, and that the grant of relief will not prejudice the Government’s interests.[16]  Taxpayers seeking to employ a Section 9100-3 request should seek out an experienced tax attorney, as the process requires a higher level of skill and precision in order to obtain relief.

Critically, to obtain this form of relief, a taxpayer must be reasonable and act in good faith. The IRS will consider a wide range of facts with respect to this inquiry. Under subsection (b), a taxpayer will be deemed to be both reasonable and to have acted in good faith if the taxpayer: (i) requests relief after the failure to elect is discovered by the IRS; (ii) failed to make the election as a result of intervening circumstances out of the taxpayer’s control; (iii) reasonably relied on the IRS or a tax professional; and more.[17]

Under some circumstances, however, a taxpayer will not be deemed to have acted in good faith. For instance, if a taxpayer relies on the advice of a tax professional and knows or should have known that the individual was not competent to render this form of advice or aware of all facts, then the taxpayer did not reasonably rely on a tax professional.[18] Other instances in which a taxpayer neither acted reasonably nor in good faith are: when relief is requested while simultaneously seeking to alter a return to avoid an accuracy-related penalty; when the taxpayer chose not to elect despite being aware of all circumstances and consequences; and when hindsight is used in requesting the relief.[19]

The IRS will not grant a taxpayer relief, however, if doing so would be prejudicial to Government’s interest.[20] Section 9100-3 outlines two common circumstances in which the Government would be prejudiced: (i) a lower tax liability and (ii) closed tax years.[21] First, the Government’s interests are prejudiced if granting relief would result in a lower tax liability than the taxpayer would have had if the election were timely filed.[22] Second, the Government’s interests ordinarily are prejudiced if the grant of relief would follow the close of the period of limitations on assessment.[23]

 

 

[1] https://www.thetaxadviser.com/issues/2014/jul/tpp-july2014-03.html.

[2] https://www.irs.gov/pub/irs-tege/eotopicb88.pdf.

[3] Section 301.9100-1(a) provides that the regulations under § 301.9100-2 and § 301.9100-3 provide standards the Commissioner will use to determine whether to grant an extension of time to make a regulatory election under this section.  Section 301.9100-1(a) further provides that § 301.9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of § 301.9100-2.  Section 301.9100-1(b) provides that a regulatory election includes an election whose due date is prescribed by a regulation published in the Federal Register.

Section 301.9100-3(a) provides that requests for relief subject to § 301.9100-3 will be granted when the taxpayer provides evidence (including affidavits described in § 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government.

Section 301.9100-3(b)(1)(v) provides that, subject to § 301.9100-3(b)(3)(i) through (iii), a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer 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.

Section 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted reasonably and in good faith if the taxpayer: (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under § 6662 at the time the taxpayer requests relief (taking into account any qualified amended return filed within the meaning of § 1.6664-2(c)(3) of the Income Tax Regulations); (ii) was informed in all material respects of the required election and related tax consequences, but chose not to file the election; or (iii) uses hindsight in requesting relief.

[4] 26 C.F.R. § 301.9100-1(b).

[5]26 C.F.R. § 301.9100-1(b).

[6] 26 C.F.R. § 301.9100-1(b).

[7] 26 C.F.R. § 301.9100-1(b).

[8] 26 C.F.R. § 301.9100-2.

[9] 26 C.F.R. § 301.9100-2(c).

[10] 26 C.F.R. § 301.9100-2(a).

[11] 26 C.F.R. § 301.9100-2(a)(1).

[12] 26 C.F.R. § 301.9100-2(b).

[13] 26 C.F.R. § 301.9100-2(b).

[14] 26 C.F.R. § 301.9100-2(b).

[15] 26 C.F.R. § 301.9100-2(b).

[16] 26 C.F.R. § 301.9100-3.

[17] 26 C.F.R. § 301.9100-3(b).

[18] 26 C.F.R. § 301.9100-3(b)(2).

[19] 26 C.F.R. § 301.9100-3(b)(3).

[20] 26 C.F.R. § 301.9100-3(c).

[21] 26 C.F.R. § 301.9100-3(c)(1).

[22] 26 C.F.R. § 301.9100-3(b)(1)(i).

[23] 26 C.F.R. § 301.9100-3(b)(1)(ii).

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