Why did the US refuse to accept japans terms for surrender?

Simply put, Japan's terms for ending the war were NOT a surrender, but an armistice. Contrary to popular belief, these involved not only the preservation of the Emperor as sovereign of Japan, but also the entire Fascist military and political system, in which the imperialists and warmongers would remain in power. The Japanese military, a huge and still very powerful fighting force, would not have to lay down its arms. The Japanese also planned on keeping their "core Empire:" Sakhalin, Korea, Formosa (Taiwan), and Manchuria, intact and fully under their control, while also expecting to be granted the 'right' to conduct so-called "war crimes" trials (read: summary execution) of Allied POWs in Japanese-only military courts.

If anything, Japan's plans for armistice would provide them with a second attempt to make war on the world, only with a bigger and more advanced arsenal several years later. For example, Japanese scientists were working feverishly on military endeavors such as the production of jet aircraft, a "death-ray," and atomic weapons. The atomic facilities in Korea, in particular, made especially significant progress, and according to some sources were closer to a bomb than the Germans. Imagine the horrifying prospect of after having come to the brink of victory, with so many millions of lives lost, that the Allies should sign an armistice with Fascist Japan only to have to re-fight her 20 years down the road, but this time both sides have nuclear weapons.

The USSR's declaration of war against Japan on August 8, 1945 dashed any hopes of a Soviet-mediated armistice, which is why the Soviet Union's entry into the war against Japan played such a big role in the latter's decision to surrender. The triple shock of the Atomic bombs and the Russian invasion of Manchuria made the Japanese leadership realize that all was truly lost and that they could only save themselves by yielding unconditionally to the Allies' demands.