Sometimes a taxpayer makes a seemingly minor technical mistake on his return that ends up with large consequences down the line. Shocking, yes, but it’s been known to occur. Good examples of such minor technical mistakes: using a wrong depreciation schedule on a large asset; continuing to report a corporation’s income on Form 1120S after an event that undoes the corporation’s Chapter S election; reporting income on a cash basis when the taxpayer has already elected to report income on an accrual basis. There are ways to undo some of these mistakes, if caught quickly. Others can’t be undone easily.

Sometimes a taxpayer does not know how to report a particular transaction. For instance, is a sophisticated call option contract is really an option contract, or a management contract (PLR 2015-47004)?

In all cases where the answer isn’t obvious, it helps to have the IRS commit to a position: “it’s okay to treat the transaction this way.” “Despite bringing in a corporation as a shareholder of the S Corporation (an event that automatically ends a Chapter S corporation election), you can continue to treat the corporation as an S Corporation. Assuming you pay these fees and taxes for past years, you may continue to report income on a cash basis.”

There is a process for asking for these commitments from the IRS: the Private Letter Ruling (PLR). The procedure for requesting a PLR is more than 100 pages long, and it can be found here.

The procedures govern how the request gets to the IRS building, how it gets channeled to the correct person (a staff attorney in the National Office, usually a specialist in the particular area of income tax at issue), how long the IRS has to respond (usually six months), and the user fee ($2,000 to $28,000, depending on the issue and the nature and size of the taxpayer).

Faucher Law has a successful record dealing with Private Letter Rulings. If you need to get out ahead of the IRS on an issue, give us a call.

May 2, 2017

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