As innocuous as it sounds, the Form 3115 is a tax form like no other.
A Form 3115 that is inadvertently omitted from a tax return filing can result in sizable differences in tax and trigger significant tax penalties and interest. Given the amounts that are often reported on the Form 3115, errors could cost hundreds of thousands of dollars–even millions.
The rules for the Form 3115 have changed significantly over time. They are in a constant state of flux. They are spread out in thousands of pages of guidance with some of the rules found in guidance that only applies to particular tax years.
Worse yet, there are very limited avenues for fixing a submission error for the Form 3115. Late Forms 3115 fall squarely in the problem tax return category.
A late filed Form 3115 can result in a nail biting roller coaster for the taxpayer and their tax preparer. The result has two possible outcomes: “everything is okay” or “ouch.”
This brings us to the IRS’s recent GLAM 2020-002. The guidance addresses a situation where a duplicate copy of a Form 3115 was not timely filed. The question is whether Section 9100 Relief applies to a late-filed Form 3115.
To understand the guidance, we have to consider what an accounting method change is and what a tax election is. These are two different concepts.
About Accounting Methods
Accounting methods refer to how you report income and expenses on your tax return. There is the overall accounting method–cash vs. accrual. This overall method dictates how you keep your books and records.
There are additional accounting method rules for specific items of income and expense. Our tax laws include rules for these specific items as they are unique situations. An obligation to pay for reclamation or environmental cleanup in the future is an example. The tax laws allow you to deduct those costs now even though they are to be paid in the future.
The accounting method rules present timing questions. You can sometimes report an item of income or expense in the current year or spread it out over time. By doing so, you can change the tax year in which the item of income or expense is subject to tax.
About Tax Elections
A “tax election” is special feature found in our tax laws. Tax elections allow you to claim a benefit, opt out of certain tax treatment, etc. They are usually used by those drafting our tax laws to allow new rules to be implemented or to provide a level of flexibility in applying our tax laws.
Many elections are found in the tax code. The statutes that make up our tax code are usually written to provide a tax benefit or liability. Near the end of some statutes, Congress has included language for a tax election. The election to increase basis in property for a disallowed passive activity loss credit is an example. This election can be found in Section 469.
In other instances, the election has a whole code section of its own. The mark to market election is an example. It allows investors to obtain ordinary tax losses by electing to apply ordinary tax rates rather than capital gain tax rates. The election takes up the entirety of Section 1296.
Tax elections can also be found in the regulations. The election out of Section 1031 exchange treatment is an example. This election can be found in Regulation 1.168(i)-6.
Tax elections can also be found in tax guidance, such as Revenue Procedures. The deemed election out of bonus depreciation is found in Rev. Proc. 2019-33.
The language that provides for the tax election will usually say that the election is to be made by including a statement or form with a timely filed return. The language will also usually say whether timely filed counts the time a tax return has a valid extension.
If you miss this deadline, you may be out of luck. This is where Section 9100 Relief comes in. It allows you to make these elections after this time period has passed.
Section 9100 Relief – 12 Months
There are two types of Section 9100 Relief. The first type provides an automatic twelve month extension to make a late tax election.
This type of 9100 Relief is only available for a handful of tax elections:
(i) The election to use other than the required taxable year under section 444;
(ii) The election to use the last-in, first-out (LIFO) inventory method under section 472;
(iii) The 15-month rule for filing an exemption application for a section 501(c)(9), 501(c)(17), or 501(c)(20) organization under section 505;
(iv) The 15-month rule for filing an exemption application for a section 501(c)(3) organization under section 508;
(v) The election to be treated as a homeowners association under section 528;
(vi) The election to adjust basis on partnership transfers and distributions under section 754;
(vii) The estate tax election to specially value qualified real property (where the Internal Revenue Service (IRS) has not yet begun an examination of the filed return) under section 2032A(d)(1);
(viii) The chapter 14 gift tax election to treat a qualified payment right as other than a qualified payment under section 2701(c)(3)(C)(i); and
(ix) The chapter 14 gift tax election to treat any distribution right as a qualified payment under section 2701(c)(3)(C)(ii).
If you need to make one of these elections, Section 9100 Relief can provide a great remedy. If you need to make a different type of tax election, you have to consider the six month relief rules.
Section 9100 Relief – 6 Months
The second type of Section 9100 Relief provides an automatic six month extension to make tax elections.
This type of relief covers more elections than the twelve month relief described above. In fact, this second type of relief applies to all tax elections. The only exemption is for tax elections that have to be made by the due date of the tax returns without taking into account extensions.
Thus, you have to read the language that grants the election to see if six month relief is available. You have to examine this language to see if the election can be made on an extended tax return. If it can, you can make the election late by requesting Section 9100 Relief.
Fixing Accounting Methods With Sec. 9100 Relief
This brings us back to the IRS ruling cited above that is the subject of this article. The IRS concludes that a late-filed Form 3115 qualifies for Section 9100 Relief.
It does not explain how the late-filed Form 3115 is a tax election. The form itself is typically used to make accounting method changes.
But the Form 3115 can also be used to make certain late tax elections. This is possible as the recent guidance by the IRS has authorized it.
For example, in Rev. Proc. 2019-33, the IRS provides for a deemed election out of bonus depreciation. This election is made automatically by simply taking straight line depreciation on your tax return. The thinking goes that you have automatically elected out of bonus depreciation by failing to claim it on your tax return. The rules allow you to reverse this accounting method by filing a Form 3115 or an amended return.
The deemed election in 2015-13 deemed adoption of the tangible property regulations is another example.
The blurring of the lines between accounting methods and tax elections opened the door for the IRS’s recent guidance.
The implication is that any late Form 3115, even if the Form 3115 is reporting an accounting method, would seem to be eligible for Section 9100 Relief. This is potentially great news if you ever need to change an accounting method after the deadline for doing so.
If you want to see another example of this, you can read this article for additional IRS guidance for correcting accounting method changes.