Do I respond to the letter with an S election termination and tell them the S-Corporation paperwork was filed by mistake and they want to be a partnership or switch them to an S-Corp and redo the s-corp and personal tax returns?!?! Thoughts?
An S-termination would change it to a C-corporation, so you don't want to do that. You would need to file Form 8332.
I would first try to call the IRS and try to get them to ignore the original 2553 because it was a mistake, and have them treat it as a Partnership. I suspect it won't work, but it may be worth a try.
If that doesn't work, you can look into the late-election rules for 8332, but my first thought is your client doesn't qualify. But check into them anyways.
If those don't work, I suspect you need to file 2019 and 2020 as a S-corporation. File the 8332 for this upcoming 2021 year.