Key Takeaways:
- Your CP261 notice confirms your practice’s status as an S corporation
- If you lose your CP261, you must request an IRS Letter 385C to replace it
- Opting to receive Letter 385C via fax speeds up delivery
So you’ve successfully completed and filed Form 2553, electing S corporation status for your therapy practice.
Nicely done! Now—what’s next?
Provided the information on Form 2553 is accurate and you qualify for S corp status, the IRS will send you an S corp approval letter. This is an important document—you need to keep it on file.
But what happens if:
- Your approval letter never arrives?
- You lose your copy of the approval letter?
- The IRS leaves you waiting, seemingly forever, for the letter?
This to-the-point guide covers everything you need to know about S corp approval letters from the IRS, including your CP261 notice and IRS Letter 385C.
What is an S corp approval letter?
An S corp approval letter officially confirms that the IRS is treating your practice as an S corporation for tax purposes.
It includes your S corp’s effective date. That’s the date after which your practice qualifies as an S corp.
It also includes:
- Instructions for contacting the IRS if you believe the effective date is incorrect
- Guidelines for timely filing your taxes and applying for relief if you file late
- An overview of your duties for reporting shareholder compensation
Why do you need an S corp approval letter?
In the unlikely event the IRS makes a mistake and fails to treat your practice as an S corporation, your copy of the approval letter proves its status.
Third parties may also need a copy of your letter in order to provide services. For instance, Heard requires you to submit a copy of your approval letter in order to set up S corp bookkeeping and tax filing for your practice.
It’s an important document to keep on file, along with:
- A copy of your Form 2553
- Past returns, including Schedule K-1s
- IRS tax transcripts
- Certified mail receipts for mail you send the IRS
What is a CP261 notice?
A CP261 notice is the S corp approval letter the IRS will send you after you successfully submit Form 2553.
It’s not the only document you can use to prove S corp approval by the IRS—there’s also IRS Letter 385C (covered below).
How long does it take to receive a CP261 notice?
The IRS claims you will receive a CP261 notice no later than 60 days after you submit Form 2553.
In actuality, you may find you have to wait longer. The IRS frequently has to work through backlogs of paperwork, and that can cause delays.
Once it arrives, the CP261 notice will confirm that your practice is an S corp as of the effective date of election. So, even if the letter is late to arrive, your practice is still, in all likelihood, an S corp.
The best course of action is to begin operating as an S corporation starting on the effective date for which you filed Form 2553. That means:
- Paying yourself (and any other employees) a reasonable salary
- Making distributions to shareholders (including yourself, if applicable)
- Keeping accurate financial records of all your activities as an S corp
What happens if you don’t receive a CP261 notice?
If many months have passed since you submitted Form 2553 and tax season is approaching, you can contact the IRS to check your practice’s status.
Call the IRS Business & Specialty Tax Line at 1-800-829-4933, with your EIN ready. For the best chance at success, phone during a low-volume period: around 7am or 8am, when the phone lines first open, on a Tuesday, Wednesday, or Thursday. That may reduce your wait time.
If you have trouble getting through on the phone to speak to a human being, you can submit a written inquiry to the designated IRS tax center for your state. Provide your EIN and a copy of your submitted Form 2553.
What should you do if you lose your CP261 notice?
If you lose your copy of CP261—or if the IRS says they mailed it to you but you never received it—you must request a new approval letter.
How do you request a copy of your CP261 notice?
The IRS only sends CP261 once; you won’t be able to get a second copy. Instead, you’ll need to request IRS Letter 385C, which confirms your S corp status and acts as a stand-in for CP261.
What is IRS Letter 385C?
IRS Letter 385C confirms your practice’s status as an S corp. It serves the same function as CP261 and includes the same important information (namely, your effective date of election).
How do you request an IRS Letter 385C?
To request a Letter 385C, you must phone the IRS Business & Specialty Tax Line.
Again, calling at a low-volume time gives you the best chance of success. Stick to Tuesdays, Wednesdays, or Thursdays at around 7am or 8am.
Here’s how to do it, step by step:
- Call the IRS at 1-800-829-4933
- Press option 1 for "English"
- Press option 7 for "Other Questions"
- Press option 2 for "Submitted forms or Tax History"
- Press option 1 for "Questions about Corporate"
- After you get connected to an agent, they'll verify your identity/ownership
- Request a confirmation that your S Corp election was accepted by the IRS, confirm the election date, and request a copy of the 385C letter
The IRS can mail you your 385C or you can choose to have it faxed. If you do, the agent will ask you to confirm that you have a private, secure fax line. Then you can provide them with your fax number and receive a copy of the letter that day.
Because this is the 21st Century, there’s a good chance you don’t have a fax machine. In that case, you can sign up for an electronic service—like eFax, DropboxFax, or RingCentral—that allows you to receive faxes online.
That means paying extra for the service, but it saves you waiting to receive Letter 385C in the mail.
What if you can’t get S corp verification before the tax deadline?
If the tax filing date for your S corp is approaching and you still haven’t received official confirmation from the IRS, file Form 7004 to request an automatic six-month tax extension.
Filing for an extension gives you more time to prepare your return while saving you the cost of late filing penalties. But it’s not an extension to pay—your total tax owing for the year is still due on the day of your tax deadline (or the deadline for your fourth quarterly estimated tax payment).
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For S corp tips, tricks, and best practices, check out The Complete S Corp Guide for Private Practice Therapists.
Summary
- An S corp approval letter is essential for filing your taxes and proving your S corp status to the IRS and third parties
- A CP261 notice is the default approval document you receive after submitting Form 2553
- The IRS sends CP261 once only—they won’t provide a duplicate if you lose your CP261 or if it’s lost in transit
- To replace CP261, request IRS Letter 385C, which contains the same information and also confirms your S corp status
- If the tax deadline is approaching and you still can’t get your hands on an approval letter, file Form 7004 for an automatic six-month tax extension
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