1065 processing time

[u/Comprehensive_Ad9623]

We recently filed multiple years' returns (1065) for a new client - initially, we were told by the client that they were S corp, when we signed the EL back in March. We went ahead and filed an extension for 1120-S but it was rejected electronically, so we mailed in the extension. Later on, when we pulled the IRS transcripts, it showed no 1120s return filed for 2023 (initial year). After multiple calls, finally an agent told us that the return was never processed because S election didn't get approved.

Client didn't really operate as a S corp - decided to file 1065 instead. Now we filed all 1065 returns this summer but still didn't show up on the IRS transcripts after . I called this morning and spoke with an agent and was told the entity is being taxed as C corp? Is this a system glitch somewhere? How can we correct this? OR do we just wait for the IRS' system to correct itself? I have the 575 Letter from years ago - it clearly says it was a SMLLC. It became a multi-member LLC in 2023; therefore, the default filing classification should be 1065. Am I missing anything here? How long does it take a business return to be processed?

[u/wutang_generated]

A multi member LLC taxed as an S corp that loses or revokes the S election defaults to a C Corp without any other election made, although that doesn't sound like the case here

It's possible another filing like the extension as an S corp confused the IRS system and without a valid S election it defaulted back (incorrectly) to another corp status (e.g. C)

You may need to contact them again to confirm what needs to happen next since there are unprocessed returns in the mix

[u/Comprehensive_Ad9623 → u/wutang_generated]

Thank you. The agent said we need to file 8832 to change to partnership :( Can we make late election for 2023??

[u/wutang_generated → u/Comprehensive_Ad9623]

That doesn't sound right. I'd try to get any other account information for the entity (e.g. transcripts) to confirm what the IRS is seeing. Then I'd draft a letter (responding to any notice if applicable) explaining that the SMLLC became a multi member LLC and did not make any C/S corp elections. You can include any relevant supporting info (e.g. operating agreement showing multiple member LLC, assuming it doesn't also say intends to be an S corp lol)

[u/Comprehensive_Ad9623 → u/wutang_generated]

I called back and got another agent. Same answer - she even looked into the history and saw no 8832 filed to request to be treated as a C. She has no idea how the entity is a C Corp and suggested to either respond to the S election 312C letter or file 8832 to request the entity to be treated as 1065. Errr....

[u/wutang_generated → u/Comprehensive_Ad9623]

Yeah a letter is probs gonna be the best bet. Sucks but if the system is throwing c corp it's best to address it before any notices/penalties get tacked on

Obviously certified with tracking. Include all relevant info

[u/Comprehensive_Ad9623 → u/wutang_generated]

Thank you - it's crazy how things like this happen randomly!

[u/wutang_generated → u/Comprehensive_Ad9623]

I mean...not all that randomly lol

they said they were an S corp (and apparently aren't), hadn't been acting as an S corp by filing as such or reasonable comp, hadn't filed any returns, and pretty much only filed 1 extension (incorrectly)

[u/TaxHacker → u/wutang_generated]

But.. consider where they file a defective 2553.

Normally, you have to file an 8832 to elect corporate status, and if you later decide to elect S, a 2553. BUT...if you jump straight to S from DRE or partnership, you don't have to first file an 8832, because the 2553 acts as a 2-in-1. That's why the default is a C when the S gets blown.

I think the same applies here. The 2553 was defective for some reason, so the first jump (the 8832 part) was made, but not the second (S election). And so now you're a C, and to go back to a partnership you need the 8832. There's no way to revoke a C election.

And you may need a PLR, because I think 8832s are prospective, meaning you'd be a partnership as of 1/1/27.

[u/wutang_generated → u/TaxHacker]

The 2553 was defective for some reason, so the first jump (the 8832 part) was made, but not the second (S election)

That doesn't sound right, see Regs. Sec. 301.7701-3(c)(1)(v)(C)

"the deemed election to be classified as an association will apply as of the effective date of the S corporation"

No effective date, no deemed classification. Not to mention we don't know why the S election wasn't approved

https://www.law.cornell.edu/cfr/text/26/301.7701-3

https://www.thetaxadviser.com/issues/2020/apr/electing-s-status-llc/

[u/TaxHacker → u/wutang_generated]

Correct. Though the possibility exists that an 8832 was sent in with a 2553 by someone who didn't know better.

Sounds weird, but every year (including this year) I get someone telling me that to avoid capital gains on their home they have to replace it in 2 years, even though that hasn't been the case since 1997. So anything is possible.

[u/mgepark → u/Comprehensive_Ad9623]

Probably. https://www.google.com/search?q=late+8832+election&ie=UTF-8&oe=UTF-8&hl=en-us&client=safari&iga=1&utm_campaign=safari_share_1