CP262 and CP265 are notices that your corporation's subchapter S election has ended. The IRS says the CP262 tells you it revoked your S election, and the CP265 alerts you when it terminates an S election. For the owners, the practical effect is large: the company is treated as a regular C corporation, files a different return, and cannot simply elect S status again right away.
What the notices mean
An S corporation passes its income through to shareholders instead of paying corporate tax. That treatment depends on an election and on continuing to meet eligibility rules. When the election is revoked or terminated, the company is taxed as a C corporation from the effective date. The CP262 page says the IRS "revoked your subchapter S election," and the CP265 page says it alerts you when it terminates the election. Neither IRS page explains the cause, so read your own notice for the reason and the effective date.
What the IRS tells you to do
File Form 1120 by the required due date. The IRS suggests e-filing through Modernized e-File for businesses that are authorized. Keep the notice in your permanent records. The pages do not describe penalties, and refer you to the Taxpayer Advocate Service for penalties you cannot resolve on your own. If you cannot find what you need online, call the phone number on the notice.
The five-year wait
Both pages state that you must wait five years before making a new S election. That affects tax planning. For five years, profits are taxed at the corporate level, and distributions can be taxed again to owners as dividends. Planning for compensation, distributions and retained earnings changes. See C corporation taxes and entity selection.
Questions to ask right away
- What is the effective date? The date on which the company became a C corporation determines which years are affected.
- Why did it happen? Common causes in tax law include a failed eligibility requirement (such as an ineligible shareholder or a second class of stock) or a revocation. The notice should say which. A professional can check whether the facts match.
- Was it inadvertent? In some situations the tax law allows relief for an inadvertent termination, but it requires specific steps and is not automatic. Whether it fits is a question for a CPA or attorney.
- Which returns are affected? If you already filed Forms 1120-S for years after the effective date, those may need to be refiled as Forms 1120. Owners' personal returns may also need amendment.
- What about payroll? Owner-employee wages and distributions may need to be reviewed. See reasonable compensation for S corporation owners.
Interest and penalties
The IRS pages do not describe specific penalties. Late filing of Form 1120 can cause late-filing and late-payment penalties, and interest runs on unpaid tax. See failure-to-file penalty. If you receive a later notice of a penalty, see our CP162 guide for the S corporation and partnership penalties.
Common mistakes
- Continuing to file Form 1120-S without addressing the notice.
- Assuming the five-year wait lets you skip planning for the C corporation years.
- Missing an eligibility issue, such as an ineligible shareholder after an equity change, that triggers termination without anyone noticing.
- Not telling the bookkeeper, which results in wrong estimates and wrong distributions.
- Waiting until the Form 1120 due date to start.
When to involve a CPA
Call a CPA the day the notice arrives. We can compare the notice with your election history and cap table, determine which years are affected, and prepare the right returns. If the termination looks inadvertent, we will say honestly whether an attorney should handle a relief request. With a signed Form 2848, we can contact the IRS for the company. See also business formation and entity selection.
How we can help
Our team prepares Forms 1120 and 1120-S and advises on entity planning. If a CP262 or CP265 arrives, we can review it with you and map the options. See our IRS representation services or contact us.
Frequently asked questions
Does this mean my company is no longer an S corporation?
That is what the notice says. The IRS revoked or terminated the election. Check the effective date and the stated reason.
Can I file another S election?
The IRS says you must wait five years before making a new election.
What return do I file now?
The IRS directs you to Form 1120.
Can I challenge it?
You can call the number on the notice and, with professional help, explore whether the termination was in error or may qualify for relief.
Official sources
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.