IRS Provides More Guidance on “Relevance” and Foreign Entities Making “Check-the-Box Elections”

In a previous post, we highlighted guidance released by the IRS on the topic of “relevance” and some of the implications it had in the pre-immigration planning context.  More specifically, the guidance addressed issues relating to so-called “check-the-box” elections, whereby certain non-U.S. entities may elect their classification (as a corporation, partnership, or disregarded entity) for U.S. federal tax purposes. In that post, we raised a few practical questions relating to how Form 8832, Entity Classification Election, should be prepared in light of the new guidance. The IRS addressed some of those questions in recently released FAQs.  

The full text of the IRS guidance can be found here: https://www.irs.gov/forms-pubs/faqs-for-form-8832-and-foreign-eligible-entities. In short, the IRS has now clarified that in the case of a foreign eligible entity whose classification was never relevant, the first filing of a Form 8832 should be prepared as an initial classification election. Notwithstanding the form of the election as an initial classification, the effect of the election will be to trigger the deemed consequences that attach to a change in classification, as outlined in the initial IRS guidance that came out in 2021.¹ The IRS further confirmed in the FAQs that even though such an initial election will effect the consequences of a change in classification, such entity will not be barred under the 60-month limitation from making a subsequent change in classification.

As was the case with the initial guidance released by the IRS, practitioners and clients should remember that the recent guidance, issued in FAQ format, does not constitute binding legal advice from the IRS and cannot be relied upon by taxpayers as precedent. Nevertheless, it serves as a useful practical guide for practitioners preparing Form 8832.

Whether or not such an election is being made in the pre-immigration planning context, clients and their advisors should consult with qualified U.S. tax counsel in advance of filing such an election in order to determine the associated U.S. tax outcomes.

^{1] Depending on the circumstances and the desired planning outcome, this could be beneficial or harmful from a U.S. tax perspective.}