Partnership Late Filing Penalty Abatement

Partnership Late Filing Penalty Abatement

• For tax years beginning in 2010, the late filing penalty amount for a Partnership (or S-Corporation) return has risen to $195. This penalty is calculated based on the total number of shareholders/partners during any part of the tax year multiplied by each month-or partial month-the return is late (up to 12 months). An example is provided below: 
• An S-corporation with a calendar-year end (Jan 1-Dec 31) is required to file the 1120S annual tax return on the 15th day of the third month following the close of the tax year—or March 15th of the following year. If the corporation has 3 shareholders, no extension of time to file was submitted and the return was filed on July 16th, the late filing penalty is calculated as follows:

•  Number of shareholders during the year = 3
•  Months late = 5 (March 16th – July 16th)  Note:  If submitted on July 15th it’s only 4 months late.  If submitted on July 16th it's 5 months late.
•  $195 penalty x (3 shareholders) x (5 months late) = $2,835

• All penalties imposed by taxing agencies are non-deductible for income tax purposes, so you’re hit twice by the same penalty. Not only are you required to remit an unnecessary penalty, but you’re also denied the deduction of the penalty on that year’s tax return.
• No penalty will be imposed if the partnership or S-corporation shows that the late filing was due to “reasonable cause”, but what constitutes reasonable cause? This term can be interpreted in many different ways by taxpayers and by the IRS and deserves a blog of its own. It is up to the IRS to determine if your cause is reasonable, so it’s in your best interest to timely file all tax returns.
• I hope none of you simply paid the notice without consulting your Enrolled Agent or accountant as you may have paid the IRS a penalty that they would have automatically abated.
• All you have to do is answer several easy questions:  

1. Is the partnership a domestic partnership? 
2. Does the partnership have 10 or fewer partners? (husband and wife and their estate are treated as one partner) 
3. Are all partners natural persons (other than a nonresident alien) or an estate of a deceased partner? 
4. Is each partner’s share of each partnership item the same as his share of every other item? 
5. Have all the partners timely filed their income tax returns? 
6. Have all the partners fully reported their share of the income, deductions, and credits of the partnership of their timely filed income tax returns?

(See this memo on Rev Proc 84-35 where this is discussed in more detail)

• If your answered “Yes” to all six questions, then send quick letter to the IRS affirming each of the points.  This should result in automatic abatement of the penalties.  There has been a 100% abatement success over the last few years with a standard letter affirming the six points, so it seems to work very well.
• A partnership that fails to file a completed return on time, including extensions, is subject to a penalty for their violation of IRC Sec. 6698. The penalty will equal $195 per partner, per month or part of a month (up to 12 months) that the return is late.  So this is becoming more and more important to small partnerships that may not be aware of the automatic abatement.
• This can become very expensive if there is a large amount of partners within the partnership. If there are 100 partners, the penalty would be $1,950 per month until the return is file completely.
• The penalty can be waived by the IRS if the partnership is able to show that there is a reasonable cause for the failure to file a complete or timely return. This penalty also applies to corporations that choose Subchapter S status and fail to file a complete return on time.

As a reminder, filing late is defined as filing after the due date. For calendar year Partnerships, that date is the following April 15th. If they filed a valid 5 month extension on IRS Form 7004, then the extended due date for filing will be on September 15th.

Now, it seems the IRS has grown tired of Rev Proc 84-35 abatement requests, as they have been trying to shift the discussion of penalty abatement to “reasonable cause”. Do not let them do this! Rev Proc 84-35 is available if you meet the criteria. Even if you have claimed it several years, do not let them try to claim that they cannot abate the penalty or get you side-tracked with a reasonable cause argument – stick to citing Rev Proc 84-35 until you get your abatement.