Does the IRS Often Reject S‑Corp Election Forms?

Businesses that choose to be taxed as an S corporation must complete a S Corp registration. They need to submit IRS Form 2553. Although many S-corp elections are accepted when the paperwork is complete and timely. However, the IRS rejects a number of Form 2553 filings each year due to various reasons.

Here, we will answer your question to clarify the rejection of S Corp election forms and how you can prevent them.

How the IRS Processes Form 2553

1. Receive the Form

You mail or fax your completed original copy of Form 2553 to the IRS. The Service Center logs its receipt and begins processing.

2. Initial Review

The IRS reviews and checks:

• All required fields are filled.
• Every shareholder has signed the form.
• The form was filed within the allowable deadline (generally no more than 2 months and 15 days after the tax year begins for the election to take effect that year).

3. Processing Timeline

The IRS verifies eligibility and determines whether to accept or reject the election. The standard review time is approx. 60 days from when the IRS receives Form 2553. The processing period may extend up to ~150 days (an extra ~90 days) if you have requested a fiscal year ruling by checking Box Q1 in Part II.

Notification of Acceptance or Rejection

The IRs send a written notice after review. Here are common ones:

1. Acceptance (CP261 Notice):

• Confirms the S Corp election is approved.
• Shows the effective date of the S-Corp status.
• You should keep this notice with your permanent business records.

2. Rejection (CP264 Notice):

• Explains why the election wasn’t accepted.
• You can correct errors and resubmit a new Form 2553 if necessary.

4. After Acceptance

Once the IRS accepts the election:

• Your corporation will be treated as an S corporation for federal tax purposes starting on the effective date you requested.
• You will begin filing Form 1120-S for annual returns and issuing Schedule K-1s to shareholders.

The S election remains in effect until it is revoked or terminated, unless you choose to change it later.

The Most Frequent Reasons for IRS Rejections

Missing or Incomplete Shareholder Consent

Not having signatures from all shareholders who owned stock as of the election effective date. This includes spouses in community-property states, trustees, and others.

Filing After the Deadline

Form 2553 must generally be filed no later than two months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the preceding tax year.

Ineligible Shareholders

The IRS will reject the election if a shareholder is ineligible (e.g., non-resident alien, partnership, corporation, or an improper trust).

Incorrect or Inconsistent Information

Errors like incorrect EIN, mismatched corporate name, wrong shareholder details (name/SSNs), or inconsistent information on the form.

Wrong Effective Date

Incorrect effective date that doesn’t properly align with the tax year or the 2 months and 15 days window.

Improper Tax Year Selection

Selecting a fiscal year (instead of the required calendar year) without completing Part II.

Failure to Provide Adequate Late Election Or Other Required Statements

The IRS requires a detailed, reasonable cause statement and additional documentation if the filing is late.

Filing With the Wrong IRS Service Center or Address

Incorrect or outdated IRS filing addresses can delay processing and sometimes lead to the perception that the form wasn’t timely filed.

14. Tips to Avoid IRS Rejection

Here are the tips:

1. File Before the Deadline

Submit Form 2553 within 2 months and 15 days of the start of the tax year. For a January 1 start, the deadline is March 15. You can also file anytime in the prior tax year for future effectiveness.

2. Make Sure Your Business Qualifies

Confirm your company is a domestic corporation (or an eligible entity electing corporate status) with 100 or fewer shareholders. Shareholders must be U.S. individuals, certain trusts, estates, or qualifying tax-exempt organizations, not corporations, partnerships, or nonresident aliens.

3. Have Only One Class of Stock

Your company must issue just one class of stock. Differences in voting rights are allowed, but not differences in distribution or liquidation rights.

4. Check That Your Tax Year is Allowed

Use a permitted tax year (usually a calendar year) unless you qualify and properly elect a fiscal year.

5. Enter All Business Details Exactly as IRS Records Show

Your EIN, company name, and address must match IRS records precisely to avoid processing delays or rejection.

6. Choose the Correct Effective Date

The effective date should be the start of the first tax year the S corp election applies, typically when the company first had assets, shareholders, or started business.

7. Complete All Shareholder Information Fully

List every shareholder’s name, address, SSN/EIN, shares owned, ownership dates, and tax year. Use continuation sheets if space runs out.

8. Get Every Required Signature

An authorized corporate officer must sign, and all shareholders must consent in Part I, Column K. In community property states, spouses may also need to sign.

9. Don’t Forget Former Shareholders (If Applicable)

Anyone who owned shares between the effective date and filing date must provide consent.

10. Handle Late Elections Correctly

If you missed the deadline but are within 3 years and 75 days, you may qualify for relief. Write “FILED PURSUANT TO REV. PROC. 2013-30” at the top and include a reasonable cause explanation.

11. Keep Shareholder Tax Reporting Consistent

All shareholders must report income as if the S corp election were in effect. Inconsistent filings can jeopardize late relief.

12. Send the Form to the Correct IRS Center

Mail or fax the original form to the proper IRS service center (Kansas City or Ogden, depending on location).

13. Keep Proof You Filed

Use certified mail, fax confirmation, or delivery tracking, and keep copies for your records.

14. Follow Up If You Don’t Hear Back

The IRS usually responds within 60 days (longer for fiscal year requests). Contact them if you don’t receive an acceptance notice.

Conclusion

Review your form before you file. Go through each eligibility rule, double-check shareholder details and signatures, and confirm your effective date. Also, make sure your EIN and business information match IRS records exactly. Take a few extra minutes to review your Form 2553 to save months of delays, and amended filing.

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