Designating your business as an S corporation with the IRS offers a host of benefits, most notably pass-through taxation. Unfortunately, S corp election issues are common problems faced by business taxpayers. Oftentimes, taxpayers learn about a filed election when they receive an IRS letter or notice in the mail. Among the most common are Letters 312C and 3853C.
Find out what it means if you receive these notices and what you can do about them. Depending on why you received the letter, you might need to respond with the help of a tax professional. Thankfully, the tax professionals from Wiggam Law have experience handling S corp election issues. Contact us as soon as you can to figure out how to repair your S Corp status designation.
Key Takeaways
- Letter 3853C – The IRS usually sends this if there’s a concern with your S corporation election request, either with the effective date of the election, the form you used to apply for the election (Form 2553), or if an election was not on file.
- Letter 312C – The IRS often sends this if your election was rejected due to missing or incomplete information when you filed Form 2553.
- S corporation election challenges – If you mistakenly believe your business has S corp status, you could face surprise tax bills (due to double taxation) when the IRS treats your business as a C corporation.
- Professional tax help –S corporation election problems are near the top of the list of tax issues that require assistance from a tax pro.
Why You Received IRS Letter 3853C
Letter 3853C is a notice from the IRS informing you that there’s a complication with your tax filing that relates to an S corp election. These tax filings are typically:
- IRS Form 1120, U.S. Corporation Income Tax Return;
- IRS Form 1120-S, U.S. Income Tax Return for an S Corporation; and/or
- IRS Form 2553, Election by a Small Business Corporation.
If you receive a 3853C letter after filing Form 1120, then most likely the IRS is telling you that Form 1120 can’t be processed because the IRS believes you should’ve filed Form 1120-S instead.
If you receive a 3853C letter after filing Form 1120-S, then the IRS might be telling you that Form 1120-S can’t be processed because the IRS believes you should’ve filed Form 1120 instead.
These inverse scenarios often occur because either the IRS rejects your Form 2553 or the IRS grants your election request, but the timing of the election effective date doesn’t match the timing of your 1120-S filing. This can lead to the IRS’s automated systems automatically flagging your return that it believes does not match your company’s designation.
What You Should Do If You Receive Letter 3853C
S corp elections are complicated, as there are numerous reasons for not getting the election. You may have missed the deadline, have missing or inaccurate information, or have missing signatures. If your election was rejected by the IRS because of a defect with Form 2553, you’ll need to figure out what you missed and refile your Form 2553.
How you do this can vary, but this often involves filing Form 2553 within three years and 75 days of the desired effective date of the S corp election. Then, at the top of the form, write “Filed pursuant to Rev. Proc. 2013-30.” Additionally, the following conditions must also exist:
- You intended your business to be classified as an S corporation.
- Your business was eligible for this election.
- You had reasonable cause for your failure to file Form 2553 on time.
- Your business and its shareholders reported their income consistent with S-corp election requirements; and
- You acted diligently to correct the error as soon as you discovered it.
You may also need to attach a separate document to explain why you’re filing Form 2553 late and how you acted diligently to address this mistake if there isn’t enough room on Form 2553.
Sometimes you can file Form 2553 with nothing else, but your situation might allow you to file it along with Form 1120-S. This might arise if your 2553 form wasn’t timely filed and you still haven’t filed your business’s Form 1120-S for the first year of the intended S corp election.
Because of the complicated nature of late election relief, you should consult with a tax professional–failing to address this issue can significantly affect how much you pay in taxes.
Why You Received IRS Letter 312C
This is a less common form, but getting it usually indicates the IRS has rejected your S corporation election. There are many potential reasons the IRS might reject your election request, but it may stem from the IRS being unable to process the Form 2553 you filed.
What You Should Do If You Receive Letter 312C
Two common reasons the IRS rejects an S Corp election include Form 2553 missing information or a failure to include necessary documentation. If either applies to your business, you may need to file 2553 again.
Depending on the timing of when you received Letter 312C and when Form 2553 was due, you might need to request late election relief when you resubmit Form 2553. By the time you received Letter 312C, the deadline for applying for the S corp election for the tax year in question has probably passed.
Other Letters the IRS Might Send You Concerning Your S Corporation Election
If there’s an issue with your S corporation election request, you might not see 312C or 3853C, but different notices. Some of these could include:
- Letter 3852C: There’s a problem with your LLC tax filing, which could require the filing of Form 2553.
- Letter 262: The official notice whereby the IRS revokes a business’s S corporation election.
Potential Concerns When an S Corp Election Goes Wrong
Not obtaining an S corporation election as anticipated could result in double taxation if the IRS deems your business to be a C corporation. This could result in huge tax bills involving surprise corporate income tax liabilities and civil penalties. There’s also the potential for shareholders to lose the ability to deduct operating losses on their individual income tax returns. Depending on how you’ve been operating, you may also eventually face payroll or compliance issues – if your election is reversed, you may need to reclassify dividends as wages.
As discussed above, there are ways to deal with S Corp election difficulties. However, these processes rely on procedural relief options that depend on the taxpayer’s case fitting into a predefined scenario that the IRS has anticipated.
If your tax matter doesn’t qualify for one of these predefined late election relief remedies, another option is to request a private ruling letter from the IRS. This is a decision for a specific taxpayer that only applies to that specific tax matter and taxpayer. The IRS offers these ruling letters for taxpayers with very complicated tax questions that the IRS hasn’t seen before or doesn’t have rules or procedures in place to address.
The drawback with requesting a private ruling letter is that it can take some time to obtain. The process is lengthy, often taking anywhere from six months to over a year to receive a final determination from the IRS. It’s also an expensive process, normally requiring assistance from a tax professional and payment of a private letter ruling fee to the IRS. As of the first quarter of 2025, the fee for a private ruling letter is $43,700, although there are circumstances that qualify applicants for reduced fees ranging from $3,450 to $9,775.
Private letter rulings can often be avoided if a taxpayer consults with a competent tax professional before requesting an S corp election or as soon as the taxpayer finds out something’s wrong with their election request. The good news is that if there’s a mix-up with your S corporation election, the IRS typically notifies you quickly.
For example, if the IRS can’t process your Form 1120-S income tax filing because it has no record of an active election on file, the IRS will send you a notice, such as Letter 3853C.
While not required as a part of the filing process, a tax filing as important as Form 2553 should always be filed with some sort of delivery confirmation, such as Certified U.S. Mail, return receipt requested.
Common Mistakes That Lead to 3853C or 312C Letters from the IRS
You might expect a 312C or 3853C letter from the IRS if you make one or more of the following common mistakes:
- Missing the filing deadline for Form 2553.
- Providing inaccurate or incomplete shareholder information on Form 2553.
- Not obtaining the necessary information and signature from the shareholders for Form 2553.
- Assuming the election request has been approved by the IRS without formal confirmation (CP261 or Letter 385C).
Wiggam Law Can Help With S Corporation Election Issues
Not all tax issues necessitate a tax attorney or enrolled agent, but if you recently received a 312C or 3853C letter, you should strongly consider talking to a tax professional, like one from Wiggam Law.
Even if you’re only thinking about pursuing S corp status for your business, you should still reach out to prevent any snags with Form 2553 or 1120-S filings. We can also help you avoid other potential tax problems, like unfiled taxes. You can reach us either online or by calling (404) 233-9800.
S Corp Election Frequently Asked Questions
What’s the difference between a 385C letter and CP261?
The IRS sends out CP261 after approving your S corporation election. When you receive this, it’s important to keep it in a safe place, as it serves as proof of your approval and the date your election became active.
If you lose CP261, you can ask the IRS to verify your S corp election status, including the election starting date. The IRS will provide this verification by sending you Letter 385C.
Can I appeal an S corporation election rejection?
There’s no official or universal “appeal” process if you disagree with the IRS on a matter concerning S corporation elections. That said, if the IRS rejects your election request, there are specific procedures in place so you can try again.
Could I get audited for S corporation election issues?
Absolutely. Even if there’s no concern about the status of your election or when it became active, your business could still get audited by the IRS. For instance, if you’re not paying a reasonable salary to your business’s employees, that could raise an audit red flag with the IRS.
Can I obtain late S corporation election relief even if more than three years and 75 days have passed?
Yes, but your business must be otherwise eligible for late election relief, and:
- At least six months have passed since the date your business filed its income tax return for the first year it intended to be treated as an S corp by the IRS;
- Your business or its shareholders never received notice from the IRS of any S corporation status problems within six months of the date you filed Form 1120-S for the very first time; and
- The completed election form includes all required statements.
Otherwise, your only option is to request a private letter ruling from the IRS, a formal, complex, and expensive process that requires the help of a tax professional.
Sources
https://www.irs.gov/irm/part3/irm_03-013-222r
https://www.irs.gov/irm/part21/irm_21-007-004r
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https://www.irs.gov/pub/foia/ig/wi/wi-03-0423-0485-redacted.pdf
https://www.irs.gov/forms-pubs/about-form-2553
https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/08/VOL-1_MSP-16_21_TaxAdministration.pdf
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