Oversight in IRS Guidance Affecting S Corporations

Late last October, we wrote about a new revenue procedure by the IRS that allows S corporations and their shareholders to resolve certain issues without having to resort to a private letter ruling (PLR).

Prior to this revenue procedure, S corporations and their shareholders were often forced to turn to PLRs to resolve even simple mistakes. Since the filing fee for a PLR can run as much as $38,000 plus legal fees and usually takes at least two to three months, this was a burdensome process for many businesses.

Rev. Proc. 2022-19 declared the following situations now resolvable without a PLR:

• Disproportionate distribution of proceeds
• One or more nonidentical governing provisions
• Inadvertent errors or omissions such as missing shareholder consents, a missing officer’s signature, or other inadvertent errors and omissions
• Federal income tax returns inconsistent with S and Q-Sub elections
• An unverified S election
• Agreements with no purpose to circumvent one class of stock.

Possible Oversight in Guidance

Under the new guidance, if a business has inconsistencies in its governing provisions—paperwork that creates an organization, including a corporate charter, articles of incorporation, and bylaws—its S corporation status can be redeemed without a PLR.

Likewise, if a business has a disproportionate distribution of proceeds, which disqualifies it from S corporation status, its status can now be redeemed without a PLR—as long as its governing provisions provide for identical distribution rights.

However, if it has both nonidentical governing provisions and disproportionate distribution of proceeds, the business will still need to request a PLR. It is unclear whether the guidance applies to situations in which disproportionate distributions are caused by non-identical governing provisions.

Until the issue is resolved with further clarification from the IRS, the relief for S corporations will not be as widely available as the guidance apparently intended.

What Does This Mean for You?

The upshot is that while the new guidance is a step in the right direction, owners of S corporations should be extremely diligent in ensuring that both their paperwork and their actions align with all IRS filing requirements. This can save all manner of headaches—not to mention money—in the future.

Tonneson’s CPAs and advisory service professionals are here to help. Contact us today.

Contact us at Tonneson + Co today to learn how we can help.