Adding Mark-To-Mark election for trader tax status during Audit.

[Darek]

Hello, one of the members mentioned that the irs or the state when audit will allow deductions that you missed during the audit process. Will the audit process or the auditor allow the addition of a Mark-to-market election that was missed?

[Anonymous_]

Doubtful, at best.

I'll page @Mike9241 

[Mike9241]

under the rules the election must be made with a timely filed return or a timely filed extension. No late election is allowed. so, the IRS should not allow you to opt in to a late MTM election. 

[Darek]

Yes those are rules for filers however an Audit is  effectively opening up the return for correction so it is in a way an extension. The auditors do add back missed "wash" sales to return so it only logical that mark-to-market election (wash sales are not added) would be accepted. I did find one case online where someone claimed during audit that they forgot to make the election and the IRS accepted it. 

[fanfare]

Your MTM election effective this year  has to be attached to your timely filed tax return without extensions.

In other words, making the election on your 2022 tax return won't let you tile MTM on that return.

IRS says: "It's important to note that in general, late section 475(f) elections aren't allowed."

If timely elected, you have to file MTM.

And you can't go back to the regular filing without IRS approval.

@Darek 

[Mike9241]

@Darek opening up a return for audit is not the same as an extension. its purpose is to see that the tax laws were complied with and if not, changes are made.  since evidently no MTM election was made with the original return the tax laws were complied with if MTM reporting was not used. as a matter of fact, the MTM is made with the current return to take effect in the next tax year. there may be cases of the IRS allowing a late election - still effective for the following year - but those would almost certainly be where the taxpayer used a professional to prepare their return, the taxpayer requested the pro file a MTM election, but the pro blew it.  so auditing year xxxx+1 won't change the fact that the election needed to be made with a timely file return for the year xxxx.

[Darek]

So a follow-up question would be: If  you are audited for a 3 year period and the MTM was supposed to be filed by a professional service 4 years back but they didn't and you have record in your files you made the election. Can that be submitted during the audit process?