If you’re trying to maximize the business tax savings of your business, you might request an S corporation election from the IRS. But your ability to take advantage of these tax benefits could be in jeopardy if you receive an S-Corp letter from the IRS indicating there’s no election on file or the IRS is rejecting your election request. If this happens, don’t panic.
There are options available. Our team of tax professionals is here to help you figure out what went wrong and fix it. Call Wiggam Law at (404) 233-9800
Key Takeaways
- Notice of denial – The IRS most likely sent Letter 312C, Letter 3853C, or a CP264 notice to inform you that the IRS doesn’t have an active S corp election on file or there was a problem with your Form 2553 filing.
- Reasons for election rejection – Common reasons to reject an S Corp election request include business ineligibility, filing error, or missing signatures.
- Resubmitting Form 2553 – If the IRS denies an S corporation election, your business can usually re-file Form 2553.
- Hiring a tax pro can help – You aren’t required to hire a tax professional to reapply, but their assistance can be invaluable when trying to understand why the rejection occurred and how to fix the mistake that led to the denial.
How We Got Here
If you’re reading this, chances are high that you received one of the following notices or letters from the IRS:
- IRS Letter 312C: If the IRS rejects your S Corp election request with this letter, it’s probably because the IRS Form 2553, Election by a Small Business Corporation, you submitted earlier had incomplete or missing information.
- IRS Letter 3853C: This notice often comes up when the IRS is processing Form 1120-S, U.S. Income Tax Return for an S Corporation, and IRS records indicate no record of Form 2553 on file.
- CP264: This IRS notice is sent to inform you that the IRS has denied your S corp election request and provide the reason for the rejection.
Why the IRS Refused Your S Corp Election Request
S corporation tax issues are among the more complicated tax matters businesses have to deal with. Because of that, there are many reasons why the IRS might deny your election or inform you that your business has no active S corp election status. That being said, below are some of the more common reasons the IRS gives in these scenarios.
Your Business Wasn’t Eligible for an S Corp Election
To receive the small business corporation election, your business must meet all of the following conditions:
- It’s a domestic corporation.
- It has 100 or fewer shareholders.
- The shareholders are individuals, estates, certain trusts, or specific exempt organizations.
- There are no nonresident alien shareholders.
- There’s only one class of stock issued by the corporation.
- It’s not an insurance company, domestic international sales corporation, bank, or thrift institution that uses the reserve method of accounting for bad debts.
- It currently uses (or will use) an eligible tax year, such as a calendar year, natural business year, or tax year as elected under Section 444.
- It obtained proper consent from each shareholder.
This last condition sometimes leads to problems when Form 2553 contains missing signatures, which leads us to our next reason for a failed S corp election.
Missing Signatures
This sometimes becomes an issue when not just the shareholders’ signatures are required, but also their spouses’ if they live in a community property state.
Inadvertent Filing Error
In addition to a missing signature, another mistake that occurs when completing Form 2553 is electing S corp status for the wrong year. This might occur if your business is trying to change from C corporation status to S corporation status in the middle of its tax year and/or changing the type of tax year it uses.
The IRS Is Slow
The IRS not processing tax filings promptly is nothing new. But sometimes, even if the Form 2553 your business filed has been approved, not all parts of the IRS system are aware of that.
For example, if you file Form 1120-S, the IRS will check its system to see if there’s an S corporation election that’s active for your business. If the IRS’s systems aren’t fully updated to reflect a recent S corp election approval, the IRS might send you Letter 3853C stating the S corp election is not on file, even though that’s not true.
One method for mitigating this issue is submitting Form 2553 via Certified U.S. Mail, return receipt requested. This serves as proof of not just when you sent your form, but also confirmation that the IRS received it. This might prove useful in situations where you’re seeking late election relief with a retroactive election date.
What To Do If the IRS Rejects or Denies Your Election Request
The exact process depends on why the IRS denied or rejected your election for S corporation status. If your S Corp election was rejected for a simple error like a missing signature, the first step is to correct the mistake on Form 2553. If the filing deadline hasn’t passed, you can simply resubmit the corrected form. However, in many cases, business owners don’t learn of the rejection until after the deadline. If this happens, you can address the deficiency and then resubmit Form 2553 following the procedures laid out in Revenue Procedure 2022-19. To do this, you’ll need to ensure the following three conditions exist:
- The mistake that led to the rejection was accidental.
- Within a reasonable amount of time after discovering the mistake, your business made the necessary changes.
- Applicable shareholders have made the necessary tax changes to their tax filings for S Corp status, as required by the IRS.
If the IRS is being slow with updating its systems concerning your business’s S Corp election, then the solution may be calling and negotiating with the IRS to update your business’s tax file so that Form 1120-S can be accepted and properly processed.
Depending on the reasons your business wasn’t eligible for S corp status, you might want to talk to an attorney about changes you can make to your business before re-filing Form 2553.
S Corp Election Rejected or Not on File at the IRS?
If you get a letter from the IRS informing you that your S corp election has been denied or is not on file, chances are good that you can rectify the mistake. However, before you do, it’s probably a good idea to first talk to a tax professional with experience handling S corporation election tax matters. They can help you understand exactly what happened and walk you through the process of addressing the reason for the issue. To get started with the S corporation tax resolution process, contact Wiggam Law by calling (404) 609-1300 or using our online contact form.
S Corp Election Frequently Asked Questions
Does filing Form 1120-S for years make a difference?
Possibly. One of the conditions for IRS Form 2553 late election relief is to show that you intended your business to have S corp status during the time in question.
Can I re-file Form 2553 immediately, or is there a waiting period?
There’s no waiting period to resubmit a new Form 2553 to the IRS, assuming you’re trying to reapply following a denied election request. If the IRS terminated an existing S corporation election, then there’s a five-year waiting period before you can re-elect S corporation status.
What happens if my business doesn’t receive S corporation status?
Your business and shareholders might face additional taxes due to having to reclassify distributions as wages or as taxable dividends. This could include payroll and employment taxes, as well as the “double taxation” you were trying to avoid by electing your business to be treated as a small business corporation.
Your shareholders may also face a bigger tax bill when they lose the ability to deduct operating losses on their individual tax returns. If your business or shareholders can’t immediately pay these surprise tax bills, it could eventually lead to IRS tax collection actions.
Can I appeal a denied S corporation election?
There isn’t a formal appeals process, but there are certain procedures you can use if you disagree with the IRS’s rejection of your election request. For failed Form 2553 filings, Revenue Procedure 2022-19 may be applicable. Alternatively, you could request a private letter ruling, but this can be a lengthy and expensive process.
Sources
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