What is a CP261 Notice and What Do I Need to Do With It?

Receiving a CP261 notice from the IRS can be a moment of both relief and responsibility for business owners. This notice confirms the acceptance of your business’s election to be treated as an S corporation. Here’s what you need to know about the CP261 notice and the steps you should take after receiving it.

What Is a CP261 Notice?

A CP261 notice is an official communication from the IRS that confirms the approval of your Form 2553, “Election by a Small Business Corporation.” This form is used by businesses to elect S corporation status for federal tax purposes. The notice includes crucial information such as the effective date of your S corporation status and provides instructions for maintaining compliance with IRS requirements.

Key Information Included in the CP261 Notice

1. Confirmation of S Corporation Status: The notice officially confirms that the IRS has accepted your election to be treated as an S Corporation.
2. Effective Date: It specifies the date from which your S Corporation status begins.
3. Record Keeping: Instructions to keep this notice in your permanent records for future reference.

What You Need to Do with the CP261 Notice

1. Send to your Accountant: Once you’ve receive your CP261 notice, send a copy to your accountant. The notice provides crucial information that is needed for the tax return. Your accountant should not file the annual 1120-S tax return until the notice has been received.

2. Maintain for your Records: Keep the CP261 notice in your permanent records. This notice serves as proof of your S corporation status and may be needed for future tax filings or if requested by third parties.

Additional Considerations

• Lost CP261 Notice: If you misplace your CP261 notice, you cannot request another copy. Instead, you can request an S-Corp Verification Letter (385C) from the IRS by calling the Business & Specialty Tax Line at 1-800-829-4933.
• Discrepancies: If there is a discrepancy between the effective date on your CP261 notice and what you submitted on Form 2553, it may be because the form was not filed in a timely manner. You can request a correction or relief for a late election through Revenue Procedure 2013-30. If the election was filed in a timely matter, you can write a letter to the IRS Entity Department requesting a change in the effective date with support that the election was filed timely. 

Conclusion

The CP261 notice is an essential document for any business that has elected S corporation status. It confirms the IRS’s acceptance of your election and outlines your responsibilities moving forward. If you have specific questions or need further assistance, consulting with a tax professional is always a wise step. The regulatory and compliance aspects of an S corp may seem daunting, but S Corp Advantages takes care of all of this for you, so you can save on taxes and focus on growing your business.