Entity classification: Withdrawing change request after regulations render election undesirable
December 19, 2018
Taxpayers that filed a request to change their entity classification in response to tax reform changes in the U.S. tax law might be able to withdraw that request if subsequent guidance from the government makes the change undesirable.
Election to change entity classification
Some taxpayers may have filed a Form 8832, Entity Classification Election, to change their entity classification to better align their business structure in response to changes in the law as a result of the 2017 tax reform legislation.
Some taxpayers made those elections prior to the issuance of proposed regulations or other guidance that, if finalized as proposed and given retroactive effect, would render the change in entity classification undesirable.
Other taxpayers may have made an election to change its or a related entity’s classification after the issuance of undesirable proposed regulations with the hope that final regulations—issued after the provision of the required notice and comment periods and the submission of comments—might differ from the proposed regulations.
For example, a taxpayer may have made a change in entity classification to reduce liability under section 965 (prior to issuance of Notice 2018-26) and then before Prop. Reg. section 1.965-4(c)(2)). That proposed regulation would disregard certain changes in entity classification for purposes of section 965. If that proposed regulation is finalized with retroactive effect, a taxpayer that changed its entity classification may decide that it would be better to withdraw its election to change its classification in light of the likely change in circumstances presented by the proposed regulations.
Whatever the reason, there will be taxpayers that made a change in entity classification in anticipation of, or in response to, the new tax law that, based on the change or changes in the tax landscape presented by the new tax law and any related guidance, they later decide that they would like to withdraw.
How to withdraw election
Fortunately for taxpayers that have second thoughts about the desirability of their initial decision to file a Form 8832 election to change their entity classification, the IRS provides an administrative means to withdraw that election if the taxpayer makes a timely request to do so. The means for withdrawing an election to change entity classification is described in the Internal Revenue Manual (IRM) rather than in the Internal Revenue Code or the entity classification election regulations.
IRM Part 3.13.2.26.9 (01-01-2019), Request to Withdraw Classification Election, permits the withdrawal of a Form 8832 if the IRS receives the request to withdraw before the due date of the initial tax return for the tax year the election is to become effective.
Taxpayers that want to withdraw their Form 8832 change in entity classification may do so by sending a letter to the attention of the Entity Control Unit at the IRS Service Center in Ogdon, Utah. The taxpayer’s letter needs to cite IRM Part 3.13.2.26.9 (01-01-2019), Request to Withdraw Classification Election, and indicate:
- The effective date of the election to be withdrawn
- The tax period the election was to be effective
- The due date of the return for the tax year the election was to become effective
There must also be a penalties of perjury statement signed by a duly authorized person on behalf of the taxpayer, attesting that the information in the letter is accurate. The IRM provisions do not require that the taxpayer provide a reason for its decision to change, so including an explanation of the reason is unnecessary.
For more information, contact a tax professional with the IRS Practice, Procedure & Administration Group in KPMG’s Washington National Tax:
Curt Wilson | +1 202 533 6460 | curtiswilson@kpmg.com
Lauren Roberts | +1 202 533 5616 | lgroberts@kpmg.com
Larry Mack | +1 202 533 3381 | lawrencemack@kpmg.com
