How do I fail an applicant and add a reason for rejection?

See the article on "Assigning or changing an applicant's status (recruiting step)".

To fail an applicant and add a reason for reporting and tracking purposes, click on the red thumbs down+.  

A pull-down list will appear for you to choose the reason.  If you need to enter a reason not on the list, simply type it in the top blank line as shown below. However, only users with Administrator access can edit or add to this list. All other users will be limited to selecting from existing list. Click 'Close this applicant' after selecting your reason.  You also have the option here to red flag the applicant.

Administrators now possess the ability to remove the Fail an Applicant feature by hiding the red thumbs down so that all users must provide a reason for failing an applicant. This setting is under Setup >> Other Company Settings.