An entity that electronically files an extension as an S corporation may receive the following reject:
On Form 7004, 25 is the code for the S corporation, so this reject indicates that the IRS database does not list this entity as an S corporation.
To be able to file as an S corporation:
1. The corporation must file Form 2553 with the IRS, either in the year preceding the year in which the S corporation election is to take effect or no more than two months and 15 days into the year in which the election is to take effect.
2. Receive from the IRS Notice CP261, notifying the corporation that its election has been accepted and also the starting date of the election.
Without Notice CP261 in hand, they cannot file as an S corporation, though they can seek relief for a late election. The Form 2553 instructions discuss the late election process.
If the extension request rejected before the filing deadline, the preparer may wish to consider paper filing the extension, then file Form 2553 and seek late election relief.