IRS Letter Rulings – The Fix for Big Tax Mistakes

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Mark J. Corey, CPA, JD

There are situations where a taxpayer needs to “fix” a previously filed tax return. They may have failed to include an item of income or expense, not include a tax estimate payment or even failed to record changes in shareholder stock holdings that occurred during the tax year. These types of errors can usually be fixed with a relatively simple amended return (as long as you are within the statute of limitations to file an amended return).

But what happens if you make a “mistake” that cannot be fixed with an amended tax return? What if you are an S-corporation and you fail to file your S-election on time (even beyond the late S-election options already available), or you have an ineligible S-corporation shareholder (thereby jeopardizing your S-corporation status), or you fail to file the form for your subsidiary making them a qualified subchapter S subsidiary?

Don’t panic! The IRS has a mechanism in place to resolve these types of issues and many others. It is called a letter ruling, and it is a written statement issued to a taxpayer by an Associate Chief Counsel Office that interprets and applies the tax laws to a specific set of facts. Each year the IRS publishes a Revenue Procedure that details all of the requirements to obtain a letter ruling. The current Revenue Procedure is 2016-1 and (at over 100 pages of IRS tax code and regulations) it is not easy reading. The procedures outlined to obtain a letter ruling are complicated, and your situation needs to fit into the allowed ruling topics before the IRS will consider your request. The IRS will not grant requests to your undue negligence as a taxpayer to understand and apply the tax code correctly.

However, if there was “reasonable cause” for the error, then the IRS may grant some relief for a failure to follow the tax law.

The IRS will charge a fee for the privilege of receiving a letter ruling. There is a whole menu of fees associated with these types of rulings and they can reach tens of thousands of dollars depending on the relief sought by the taxpayer.

This area of tax law is very complicated so please consult your tax advisor if you think you need to apply for a letter ruling from the IRS.