Inadvertent S Corp Termination Relief: IRC Section 1362(f)

If your S corporation election terminated because of a shareholder mistake, a missed trust election, or an accidental second class of stock, you can ask the IRS to treat the election as if it never lapsed. This is inadvertent S corp termination relief under IRC Section 1362(f), and it comes in two forms: a streamlined filing under Revenue Procedure 2013-30 for certain late-election failures, or a private letter ruling for everything else. Either route requires you to show the violation was unintentional, that you corrected it promptly, and that every shareholder reported taxes as though S status continued the whole time.¹

What Counts as an Inadvertent Termination

The IRS has broad discretion under Section 1362(f), but the corporation carries the burden of proof. Four conditions in the Treasury Regulations must all be satisfied.²

The Termination Was Not Intended

You need to convince the IRS that no one steered the corporation into the disqualifying event. Two factors weigh in your favor: that the event was not reasonably within the corporation’s control, and that it happened despite diligence in guarding against it. A one-time clerical error causing a disproportionate distribution, caught and reversed quickly, is the kind of mistake the IRS treats as inadvertent. A pattern of noncompliance, or a transaction where someone should have known the consequences, reads very differently.²

You Fixed It Within a Reasonable Time

There is no bright-line deadline. The IRS looks at how quickly you learned about the violation, what you did about it, and whether any delay was justified. A corporation that acts within weeks of discovery has a much easier case than one that sits on the problem for years.¹

Everyone Reported Consistently

Every shareholder who held stock during the gap must have reported income, losses, and distributions as though the S election stayed in effect. This is where requests most often fail. If any shareholder switched to C corporation reporting, or if anyone tried to use the termination to grab better tax treatment, the IRS will deny relief.¹

Everyone Agrees to the Adjustments

The corporation and every person who held shares during the noncompliance period must agree to whatever adjustments the IRS considers appropriate. These will be consistent with treating the company as an S corporation throughout, and can include amended returns or reallocation of income.²

Relief also applies to qualified subchapter S subsidiaries that lose their status. The parent corporation runs through the same framework.²

The Streamlined Route Under Revenue Procedure 2013-30

Revenue Procedure 2013-30 lets you skip the private letter ruling process for a specific set of problems: late S corporation elections, late QSST elections, late ESBT elections, and late QSub elections. To qualify, you have to file within 3 years and 75 days after the date the election was supposed to take effect.³

The mechanics are simpler than a ruling request. Complete the appropriate election form, write “FILED PURSUANT TO REV. PROC. 2013-30” at the top, include a statement explaining the inadvertent nature of the failure signed under penalties of perjury, and attach the package to the current-year Form 1120-S. The return goes to the same IRS service center you normally use. All shareholders must submit statements confirming they reported income consistently with S corporation treatment for every affected year.³

For late trust elections specifically, the trustee of an ESBT or the income beneficiary of a QSST must sign the election form and include a statement confirming the trust meets all eligibility requirements. The trust election failure must be the sole reason the S election was ineffective.³

There is no user fee, no six-month wait, and no ruling to negotiate. If your problem fits the categories above, this is the path.

When You Need a Private Letter Ruling

If the terminating event falls outside Rev. Proc. 2013-30, such as an accidental second class of stock, an ineligible shareholder acquisition, or a passive investment income problem, your only option is a private letter ruling from the IRS national office.⁴

The standard user fee is $43,700 for requests received after January 2026. Reduced fees are available for smaller businesses: $3,450 if gross income is under $400,000, and $9,775 if gross income falls between $400,000 and $10 million.⁵ Professional representation runs another $300 to $800 per hour, and the ruling itself usually takes six to twelve months.

Mail the ruling package to the IRS national office at P.O. Box 7604, Benjamin Franklin Station, Washington, DC 20044. For private delivery services, use 1111 Constitution Ave., NW, Washington, DC 20224.⁵ The user fee can be paid electronically through Pay.gov or by check with the submission.⁶ The IRS may follow up with questions before issuing a decision. A favorable ruling produces a letter confirming the S election was continuously in effect.

What Goes in the Request

Whether you file under Rev. Proc. 2013-30 or ask for a ruling, the paperwork revolves around two pieces: a factual narrative and shareholder consent statements.

The narrative needs to cover the exact date of the disqualifying event, how and when the corporation discovered it, what caused the violation, and what corrective steps were taken. Name the people involved and describe any professional advice you received. A sanitized summary invites skepticism; the IRS wants the full story, signed by a corporate officer under penalties of perjury.²

Every shareholder who held stock at any point during the termination period must submit a signed consent statement. No IRS form exists for these, so they have to be drafted from scratch. Each consent must include:

The name, address, and taxpayer identification number of both the corporation and the shareholder
The number of shares the shareholder owned
The dates during which the shareholder held stock
A statement that the shareholder agrees to any adjustments the IRS may require

These elements come directly from the Treasury Regulations, and leaving any of them out gives the IRS grounds to reject the package.² The consents should also confirm that each shareholder reported income and losses on personal returns consistently with S corporation treatment for the whole gap period. Supporting evidence, such as internal policies, advisor correspondence, and records showing the corporation tried to prevent the violation, strengthens the inadvertence argument.

What Happens If Relief Is Denied

A denial is expensive. The corporation is treated as a C corporation from the date of the terminating event, meaning corporate-level income tax on earnings plus a second layer when those earnings reach shareholders as dividends. Assets that appreciated during S corporation years may be exposed to the built-in gains tax if you later re-elect.

You also lose the ability to make a new election for a while. Under Section 1362(g), a corporation whose S election has been terminated cannot make a new election until the fifth tax year after the year the termination took effect, unless the IRS specifically consents to an earlier re-election.¹ For a profitable small business, five years of double taxation can add up to hundreds of thousands of dollars.

You will also need to file two short-year returns for the year the termination occurred: one S corporation return for the period before the disqualifying event, and one C corporation return for the remainder.⁷ Shareholders who already filed personal returns reporting S corporation income for that stretch will likely need to amend.

Preventing the Next Termination

A well-drafted buy-sell agreement handles most of the common triggers. It should prohibit any transfer of shares to partnerships, corporations, ineligible trusts, or nonresident aliens, and block transfers that would push the shareholder count past 100. Stock certificates should carry legends referencing those restrictions. If local law permits, the agreement should declare prohibited transfers void on their face rather than merely voidable, since a voidable transfer might briefly create an ineligible shareholder before anyone can unwind it.

The agreement should require shareholders to notify the corporation before any contemplated transfer, and a transfer agent should verify compliance before shares change hands. An indemnification clause protects the remaining shareholders from damage caused by someone else’s violation.

Companies that converted from C corporation status and still carry accumulated earnings and profits need to monitor passive investment income each year. If passive income approaches 25 percent of gross receipts, distributing the accumulated earnings and profits before the three-year clock runs out prevents the automatic termination.¹

Any time shares pass to a trust through estate planning or inheritance, someone needs to confirm the trust election gets filed on time. Calendar the QSST and ESBT election deadlines the way you would a tax return due date. A missed trust election is one of the most common paths into inadvertent termination territory, and basic administrative discipline prevents it entirely.³

1
Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination
2
eCFR. 26 CFR 1.1362-4 – Inadvertent Terminations and Inadvertently Invalid Elections
3
Internal Revenue Service. Revenue Procedure 2013-30
4
Internal Revenue Service. Late Election Relief
5
Internal Revenue Service. Internal Revenue Bulletin 2026-1
6
Internal Revenue Service. Electronic Payment of User Fees
7
eCFR. 26 CFR 1.1362-3 – Treatment of S Termination Year