IRS Extends Relief for Late “Check-the-Box” Elections
By: Claire Ollinger, CPA
A recent Internal Revenue Service (IRS) ruling aims to provide relief to taxpayers who missed check-the-box elections.
On September 3, 2009 the IRS issued Rev. Proc. 2009-41 which provides guidance for an eligible entity that requests relief
for a late-filed entity classification election (commonly referred to as a “check-the-box election”) within three years and 75
days of the requested effective date of such election.
The Rev. Proc. supersedes and significantly liberalizes the relief for late-filed entity classification elections that was allowed
under Revenue Procedure 2002-59.
IRS regulations provide rules for when a business organization will be treated as a corporation or a pass-through entity
for U.S. tax purposes (the so-called default classification rules). An eligible entity may elect to change (or confirm) its
classification for tax purposes by filing IRS Form 8832 within 75 days of the desired effective date of the classification.
This election is commonly used, for example, in the structuring of private equity funds and hedge funds where it is desirable
that an entity be treated as a corporation under local corporate and tax law but as a pass-through entity for U.S. tax
purposes. In many cases, taxpayers who failed to file check-the-box elections for the structure they had implemented faced
very negative U.S. tax consequences for their investors.
Under the old rules (Rev. Proc. 2002-59), if a taxpayer realized it had not made a check-the-box election within the 75-day
period, it could request relief under a relatively simple procedure by filing the form and attaching a statement explaining
that the taxpayer had reasonable cause for not making the election on time. While relief was not automatic, it was
generally granted by the IRS. However, in order to be eligible for this simple procedure,
(a) the election had to be for an entity which was newly formed under local law, and
(b) the du