Section 1432 Notice Meaning & How to Use It

This page explains what a Section 1432 notice is, who issues it, and how you can respond to it. You’ll learn the legal basis, the steps you should take after receiving one, and common mistakes to avoid.

What Is Section 1432?

Section 1432 refers to a specific provision in the U.S. Internal Revenue Code (IRC) that deals with the termination of an S corporation election. When the IRS determines that an S corporation no longer meets the eligibility requirements or has committed a flagrant violation, it can issue a notice under this section to terminate the corporation’s S status. The notice is formal and starts a clock for the corporation to respond or correct the issue.

This section is rarely used because most S corporation terminations happen automatically (e.g., when the corporation exceeds 100 shareholders or has an ineligible shareholder). But when the IRS does issue a Section 1432 notice, it is a serious action that can have retroactive tax effects. The notice is not a criminal charge; it’s an administrative tax action.

Why Would You Receive a Section 1432 Notice?

The IRS can issue this notice if it finds that an S corporation:

• No longer meets the eligibility requirements (e.g., more than 100 shareholders, a shareholder that is not an individual or qualifying trust, or a second class of stock).
• Has engaged in a flagrant violation of the S corporation rules, such as deliberately misreporting income or assets.
• Has failed to file required returns or pay taxes for multiple years.

The notice is not automatic; it is a discretionary action by the IRS. It typically follows an audit or a review of the corporation’s filings. The notice will state the reasons for the proposed termination and give the corporation a chance to respond before the termination becomes final.

How to Use a Section 1432 Notice

If you receive a Section 1432 notice, do not ignore it. The notice will include a deadline (usually 30 days from the date of the notice) to respond. Here is what you should do:

1. Read the notice carefully. Identify the specific violations listed and the effective date of the proposed termination.
2. Gather your records. Collect your corporate bylaws, shareholder agreements, stock transfer records, and tax filings to verify the allegations.
3. Consult a tax professional. Because this is a legal tax matter, you should get advice from a CPA or tax attorney who specializes in S corporations.
4. Prepare a response. If the IRS is wrong, provide evidence that you meet all requirements. If the violation is correctable (e.g., you have an ineligible shareholder), explain how you plan to fix it and request a reasonable time to do so.
5. Send your response before the deadline. Use certified mail or an IRS-approved electronic method to prove timely submission.

If you do not respond, the termination becomes effective. That means the corporation will be treated as a C corporation from the effective date, which can result in additional taxes and penalties.

Common Mistakes After Receiving a Section 1432 Notice

People often make these errors when dealing with a Section 1432 notice:

• Missing the deadline. The IRS is strict about deadlines. If you miss it, you lose your chance to contest the termination.
• Assuming the termination is automatic. It is not. The notice gives you an opportunity to respond.
• Not understanding the retroactive effect. The termination can be retroactive to the date of the violation, not just the date of the notice. This can create back taxes for multiple years.
• Ignoring the notice because you think it’s a scam. While there are IRS impersonation scams, a real Section 1432 notice will have a specific notice number and instructions. If in doubt, call the IRS directly using the number on their official website.

How to Respond: Step-by-Step

Here is a practical guide to responding to a Section 1432 notice:

1. Determine your response type. You can either agree with the termination or contest it.
2. If you agree: You may sign the response form included with the notice, acknowledging the termination. The IRS will then send a final determination letter.
3. If you contest: Write a letter that includes:
   • Your corporation’s name and EIN.
   • The notice number and date.
   • A clear statement that you disagree with the termination.
   • Supporting facts and documents (e.g., shareholder list, stock certificates).
   • Your signature and the date.
4. Send it to the address on the notice. If you are unsure, use the address listed in the notice’s instructions.

After you respond, the IRS will review your case. They may request more information or schedule a meeting. If they still decide to terminate, you can appeal the decision within the IRS’s administrative appeal system.

Frequently Asked Questions

What is the deadline to respond to a Section 1432 notice?

The notice typically gives you 30 days from the date of the notice to respond. The exact deadline is printed on the notice. If you need more time, you can request an extension in writing before the deadline, but extensions are not guaranteed.

Can I avoid termination by fixing the violation?

Yes, in many cases. If the violation is correctable (e.g., an ineligible shareholder sells their shares), you can propose a correction plan. The IRS may allow you to keep S status if you fix the issue within a reasonable time. However, if the violation is flagrant, termination may be unavoidable.

What happens if I ignore the notice?

If you do not respond, the termination becomes effective. The IRS will send a final determination letter, and your corporation will be treated as a C corporation from the effective date. This can result in additional taxes, penalties, and interest.

Does a Section 1432 notice mean I committed fraud?

No. The notice is an administrative action, not a criminal accusation. It means the IRS believes your corporation no longer qualifies for S status. However, if the violation is severe, the IRS may refer the case to criminal investigation, but that is rare.

Can I re-elect S corporation status after termination?

Generally, you cannot re-elect S status for five years after a termination, unless you get IRS consent. The IRS may grant an earlier re-election if the termination was due to a reasonable cause and the corporation has fixed the issue.

Limits and Additional Context

This notice is specific to U.S. federal tax law. State tax treatment may differ, so you should also check with your state tax authority. The IRS’s own publications (e.g., Instructions for Form 1120-S) provide general guidance, but they do not cover every scenario. Always rely on the specific notice you receive and consult a qualified tax professional.

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in t | Time limit (days) | days | 30 | 0
in d | Date of notice (days since Jan 1) | - | 15 | 0
out deadline | Response deadline (date) | - | d + t | 0