Why Your S Corp Election Might Be Rejected and How to Fix It

So, you created your LLC, read somewhere that making an S Corp election could help you save on FICA taxes, and everything seemed to be running smoothly. You filed your first-year tax return for your 1120S without any issues. Maybe you even did a second one, only to receive a notice stating that your S Corp election was never processed or was rejected. As a result, your first and second-year returns have now been rejected. You’ve probably received a notice like this one:

If you're feeling a mix of confusion, frustration, and panic, you're not alone. This is a common issue for newly created S Corporations. But don’t worry—there are steps you can take to understand why this happened, how to avoid it in the future, and what to do if you find yourself in this situation.

Why This Happens

There are several reasons why your S Corp election might be rejected. Here are the most common causes:

1. Errors in Your Form 2553

• Mistakes on the form: This could include an incorrect EIN, misspelled business name, or wrong date of incorporation.

• Missing information: Make sure all the required fields are completed properly.

2. Issues with Fax Submissions

• The IRS has a fax number where you can submit your Form 2553, but it’s often unreliable. Sometimes, faxes go unacknowledged  (or straight in a shred bin).

• The challenge with fax submissions is that proving you sent it can be difficult. Retain any fax confirmation or transcript, as it could help if you need to request relief later.

3. Mailing Issues

• If you mailed the form and it wasn’t received or got lost in the mail, it could result in a rejected election.

• Tip: Always send forms via certified mail to ensure there’s a record of delivery. If you didn’t do this, don’t worry—you can still file for relief.

4. You're on the naughty list (joking)

Note: The IRS generally allows 1120S filings to proceed, even without an approved S election, for the first year. This is likely why you didn’t receive the rejection until your third year of operation.

How to Avoid This in the Future

To prevent issues like this from arising, we recommend taking the following steps at Quantum Tax Consulting:

1. Send Form 2553 via Certified Mail

Always use certified mail for important documents to ensure they’re tracked and received.  It is important to include notes on the certified mail noting the Form Type.

2. Include a Transmittal Letter

Attach a letter explaining what is being sent and what documents are included.  Note the entity, EIN and write down certified mail receipt number as a reference.

3. Document Everything

   
   

   Take pictures of all documents and receipts in case you need to file for relief later.

How to Fix It

If your S Corp election was rejected, don’t panic. The IRS offers relief under Rev. Proc. 2013-30 for late S elections, provided certain conditions are met. Here’s how you can correct the issue:

Conditions for Relief

1. Intent to be Classified as an S Corp

   • The business intended to be classified as an S Corporation from the effective date. Evidence of this intent can include:

     • Setting up payroll.

     • Filing 1120S returns.

2. Timely Filing

   • The entity was denied S election because it was not filed timely.

3. Requesting Relief within the Allowed Timeframe

   • Relief must be requested within three years and 75 days from the intended effective date of the election.

4. Reasonable Cause for the Failure

   • You must demonstrate reasonable cause for failing to make a timely election. Additionally, you should show that you took prompt action to fix the mistake once you were informed about it.

If all these conditions are met, you can file for relief under Rev. Proc. 2013-30.

For full details on the IRS’s relief process, check the following resources:

• IRS Revenue Procedure 2013-30

• KPMG’s Detailed Overview