Partnership Late Filing Penalty Abatement

NEW - 2/2/14 – We have added a new updated blog post on this topic with downloadable sample letters.

If you have filed a partnership late in the last few years, chances are you received a penalty notice for late filing with a $50 “per partner, per month” late penalty.  I hope none of you simply paid the notice without consulting your CPA 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 a quick letter to the IRS affirming each of the points will result in automatic abatement of the penalties.  I have seen a 100% abatement success over the last few years with a standard letter affirming the six points, so it does seem to work very well.

For 1065 returns filed after 12/20/07, the penalty increases to $85 per partner per month late, so this is becoming more and more important to small partnerships that may not be aware of the automatic abatement.

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About Brian Germer, CPA - Parsons & Germer CPAs, LLP

CPA with Parsons and Germer CPAs, LLP in Portland, OR

44 thoughts on “Partnership Late Filing Penalty Abatement

    • No, Rev Proc 84-35 will not work for the new S-Corporation late-filing penalty. However, there is supposed to be some penalty relief available under IRC Sec. 6699(a). This penalty is fairly new and S-Corporations that filed their 2007 return late should be receiving notices shortly – if not already. Because it is a new penalty, abatement solutions like the one for partnerships have not been tested.

      Good question – I was actually planning on posting about the new S-Corp penalty, so thank you for the introduction. I will have it up as soon as I have researched IRC Sec. 6699(a). Thanks again!

  1. Either filed by 4/15, or properly extended and then filed by the 10/15 deadline. If any of the partners failed to extend or file by the 10/15 deadline then it could be an issue.

    Now, with that being said, I have never had a rejected request based on this issue, so I do not know if the IRS actually checks the filing status of all the partners. If it was rejected because of one partner filing late, then you may have to resort to some pleading with the IRS. Either that or have the partner who filed late pay the fee.

    I hope that helps.

  2. Pingback: S-Corporation Failure to File Penalty « PDXCPA – Portland Small Businesses Tax Blog

  3. I am in the same boat. I have a (S)corp that is late on filing and I know the Rev Proc 84-35 would not work becasue it clear states ” domestic partnership”.

    But I feel that this should also apply to closly held corporations. I really don’t know what to do right not, I am also reading over IRC Sec. 6699(a). But my questions is did you see that IRC Sec. 6699(a) was replead. Or am I going crazy?

    • Now I see Sec. 6699(a) – I was looking in Subtitle A – INCOME TAXES.

      Sec. 6699(a) – as applied to S-CORP late filing is Subtitle F – PROCEDUR AND ADMINISTRATION. Sorry I missed that connection before.

  4. I only wish it was repealed. The versions I found online with Google had something about being repealed, but I pulled the code section up in our research software and it says nothing about being repealed, so it is safe to say the penalty still exists and will be around for quite awhile.

    Well, the good thing about the IRS service centers is that if you do not at first succeed, you just keep sending responses as it is highly likely you will get the same person reviewing the letter. I would try and use the ideas from 84-35, but I would not directly cite it. If that does not work, you could try another approach.

    Please keep me updated though. We do not have any late filed S Corporations at our firm and so I have am very interested in how the IRS is responding to abatement requests.

    Good luck!

    • This may be useful, as it just occurred.
      My client, during 2009, was an S-Corp. which consisted of three musicians who performed in numerous states. The three shareholders are often out of town. I contacted one of the three to be the signer of the federal and 15 state returns. A package was sent by messenger to his business manager’s office. A maximum late filing penalty was assessed. I had internal records and e-mails proving that the return was processed by 9/5/10 and delivered to the destination by 9/7. The shareholder received the returns but filed them on his desk and “discovered” them in May, 2011. All three shareholders filed by 10/15/10. I didn’t cite 84-35 but recited the chain of events, and key word here–the INTENT–to file timely. Penalties forgiven. I didn’t bill the client, as there would be animosity directed at the careless one, and the fees have been substantial.

  5. Rev Proc 84-35 and it’s tenets will not help with the removal of the sub chapter s penalty.

    I work in one of the service centers and we are well aware of 84-35 and the requirements there of and that it applies only to partnerships.

    Simply put tell us the truth, explain why the return was late, and be nice about it. If you write a demanding or rude letter the person who reads it is less willing to help or go out of their way to remove the penalty. Hint we have leeway to deny a penalty abatement request, if the letter is demanding, rude, poorly written, etc.

    The first request for removal of this new penalty now requires that a manual review the history of the account for compliance, good news if you were compliant in the past there is a good chance we will remove the penalty.

    If you have not been compliant or the penalty is not removed with the first request DO NOT send and exact duplicate of the first letter to the appeals address!!

    For an appeal send supporting documentation or more information. If you don’t the appeal won’t be considdered in most cases.

  6. We failed to submit our Partnership’s 1065′s for both 2007 & 2008. Can the 84-35 process be applied to more than one year? We answer “yes” to all six questions.
    thanks.

    • Brian,

      I started a LLC in May 2007. My partner and i (two partners) never did any business activity with the LLC. No expenses, profits, nothing of any kind. No business activity at all for this LLC.

      I did not file a tax return for 07, 08, and 09. Since the tax I.D. just sits collecting dust, I figured I didn’t have to file. I meet all six answers to the above questions. Do I qualify for an abatement or will I suffer penalties?

  7. My small start up just recieved a penalty letter for 2007. Since we didnt make any money and thus did not report any income, or deductions on our individual taxes, do we still qualify as a yes for question 6 as long as we filed on time?

    Thanks!

  8. Anand –
    That is a tough one and I guess you just have to look at the facts and circumstances.

    I have had LLCs where the partners reported estimated income and deductions so that they could file by the 10/15 extended deadline. Then when they finished their LLC, they amended the return and picked up the changes between the estimated amounts and the final K-1 amounts. In that case, the LLC should be able to answer yes to question 6.

    However, if the partners did not report anything by the extended deadline, then I think there is a significant grey area there. If all the partners timely filed their original return and then amended to add the K-1 later, then you might have a case because you could argue that you estimated no income or deductions for the taxable year and therefore had nothing to report on the original return.

    Personally, I have never helped a client with a scenario like this, so I can’t tell you that it would work; however, I would give it a try and submit the abatement request as long as all the partners timely filed their original return and then amended later to pick up the K-1.

  9. Pingback: Update on S-Corporation Failure to File Penalty « PDXCPA – Portland Small Businesses Tax Blog

  10. We filed Form 7004 electronically by using ProWin Tax software for our 1065 and 1120S clients, and they have received these letters. This is for 2008 tax returns. The actual returns were filed within the extension dates. Does IRS assess penalty even Form 7004′s were filed?

  11. I have filed the removal penalty letters for 6699 late filing of S corp. The reply from the IRS is this is a one time abatement. So they did remove the penalty. I hope this is not true for 2009, could be a long year. AICPA says these letters are merely proposed exceptions and they are still waiting for hopefully new rev procedures to aleviate this small burden.

    • James, how did you phrase the letter? Was it similar to the partnership reasons–small business, family business, etc?

      I’m in a similar situation and am hoping I will get an abatement as well!

  12. I’m finding myself in a bit of a fix. I have 7 years of 1120-S and (2002 – 2008) and 7 years of 1065 (2001 – 2007) that were never filed. My long time bookkeeper left last year and I’m finding that everything was put into our filing cabinets neatly but never mailed. I’m guessing that the first ones were late, and then year 2 never got filed because year 1 was still unresolved, etc. I don’t expect that story to get a lot of sympathy from an IRS agent.

    All 1065 K1s were delivered timely. The 1120-S K1s were delivered timely, and the related 1040s were filed timely as well. In no case is there any delinquent tax that is due.

    Specific Questions:
    For 1120-S filings that were due prior to 12/31/2007: Does the fact that the late filing penalty went into affect in 2008 guarantee me that there will not be a penalty now? In other words, can I reasonably expect my penalty to be limited to the 2007 and 2008 returns?

    For the 1065 returns: This return was for 10 small companies that all banded together to form more of a brainstorming group (never any revenue at all). What are my chances of sliding by on Proc 84-35 given that (1) the members were companies instead of individuals and (2) the delinquent Sub-S returns that I’m referring to in this email were also a partner on the 1065 return.

    Any words of wisdom? I’m doing the math on the 1065 returns and seeing a huge late filing liability on a partnership that never had the first dollar of revenues. Again, all K1s were delivered timely

    • Fred,

      Curious how you made out on the 1120S penalties ? My guess is that the IRS penalized only 2008 ? Did you have any success getting this abated since it was the “first penalty abatement” ? or did they hold late filings in prior years against you ?

  13. Rev-Proc 84-35 does not work on S corps. Only a one-time abatement is available if returns have been timely for the past three years or abatement for reasonable cause. See Internal Revenue Manual 20.1.1 for reasonable cause. Reliance on a competent preparer is no longer available. So even if it’s the preparer’s fault the return is late the taxpayer would still owe the penalty. Use ordinary business care and prudence instead. Good Luck! The IRS is more agressive than ever!

  14. Question about rev proc 84-35. My client got a late filing notice and meets all the test of 84-35, except the are not natural US citizens. They are resident aliens for tax purposes though. I assume they are not eligible for relief under this rev proc and the only chance for abatement is citing reasonable cause. Any thoughts would be appreciated?

  15. I received a penalty for late filing of a sub-Chapter S return.

    The Corporation is my own one shareholder small business.
    I think it is arbitrary and capricious for the Service to abate a penalty for a partnership and not for a one person business. The Service would not hesitate to pierce the corporate veil to look behind my corporation for bad acts, nor would the courts hesitate to look behind my corporation to assess me personal liability.

    Anyone ever thought of challenging the IRS position on one person S-corp late filing penalties as arbitrary and capricious as applied? I am an attorney also and am thinking of challenging this in tax court. I probably would not be so bummed out over the penalty, which I really cannot afford, except the Service was so rude to me.

  16. I also got slapped for 2008 $1069 (the max possible) for a small LLC I have that did not have any taxes due that year and actually have a $5K credit. I’m about to file 2009 and get caught up (finally!), but I’m thinking they will nail me again for 2009. I read somewhere it is now $195/mo. Is that true?!?!? This is truly a SMALL BUISNESS PENALTY we are looking at right here! Being the only shareholder left, I struggle to keep up with the admin burden, something bigger companies have no problem with.

    Pretty ironic this is being applied so agressively during a time when we are supposedly “promoting small buisnesses!” This may be the reason I finally close up shop. The other option is to “estimate” the numbers on 4/15 conservatively and then file the ol’ correction later. What a hassle!

    I wonder what is the idea behind this rule, that so effectively penalizes the small buisness community? Is it some sort of stress test, like the ones applied to banks to see if they were viable? I’m sure it is no small contributor to small businesses closure, or to cause the filing extra paperwork estimated + corrected returns, more tax prep expenses, time, etc.

    Can anyone confirm if the per-month fee went up?

      • I recently moved my office and changed some personnel. Three pass-throughs were not extended, one S-Corp., two partnerships–all entities sustained losses. K-1s had been supplied to the partners/shareholders on time for them to file. None of these entities qualified for first time abatement. I wrote two letters citing 84-35 for the partnerships and was forgiven. I made a phone call on behalf of the S-Corp. (the largest penalty) and was given a “good compliance record” pass. The latter was not a “one-time” event, but nevertheless, the penalty was forgiven. I was relieved, but this implies that granting a penalty waiver may be less formal and more abritrary, and perhpas the loss is a factor in determining the extent to which the Treasury has been placed at risk.

        I have instructed staff to extend all pass-throughs electronically one month after the end of the year, unless work is in progress and on target for timely completion. No reason not to extend every return with such significant penalties.

  17. We are behind on paying our withholding tax for an LLC. We can show extreme hardship is there any way to reduce the penalty and interest?

  18. Is there any hope for abatement when partnership and partner individual returns were recently filed for the years 2006 through 2010?

    Partnership penalties of more than $7,000 have been assessed.

    Suggestions?

  19. I filed 250 investors k-1 by paper not electronically file and got penaly and interest for $13k.

    Any suggestion how to deal with this?

    Thanks,

    Ken

  20. My wife and I started a company (LLC) on Dec 10, 2010. I did not file a return for 2010 out of ignorance more than anything. Thinking that I should rectify this, I submitted a 2010 return with my 2011 return. There was no income for 2010, and today I receive a penalty letter for $4680.

    They are charging $195 per partner (2) for 12 months.

    I didn’t even retire out of the military until August 1, 2011. What are my chances of getting out of this??

    Thanks

  21. I just called the IRS regarding an abatement for a partnership (LLC) that was delinquent for the first time (4 partners x $195/mo x 5 mos = $3900). We did not meet the criteria listed as not all partners filed timely returns. The IRS has a “first time abatement” program for partnerships that have never been late. Penalty abated. Win.

    • Hi Chris, I am in a similar situation. Did you write an abatement letter for the “first time abatement” or was this over the phone? What do I need to include in the letter?
      Thanks!

  22. Pingback: Attention S Corporation and LLC Procrastinators | PDXCPA – Portland Small Businesses Tax Blog

  23. Pingback: Partnership Late Filing Penalty Update | PDXCPA – Portland Small Businesses Tax Blog

  24. Thank you very much Mr. Germer for providing this information. Like others we received a penalty bill on a late 1065.

    Background: We pre-prepared our taxes for 2011 in early Apr. 2012 using TurboTax (the Home and Business version) which very clearly defined the use of Schedule C for reporting.as acceptable We are a husband/wife LLC. And then we filed for an extension on the 1040. In Sep. when it was time to finish it all, my researched showed we cannot file in Schedule C because we are an LLC — so therefore we had to go to the 1065. (see 1065 instructions under “Exception—Qualified joint venture.” where it clearly states: “….and is not held in the name of a state law entity such as a partnership or limited liability company.”)

    I had already read your article in Sep 2012, and thank you it gave me a great deal of confidence that we wouldn’t suffer penalties on 1065 late filing. And now in Nov. the penalty came: $2,340.00.

    From the post above, I decided to call the IRS rather than write a long letter. It was a 3 minute call, she asked if I would like an abatement, asked if I could hold for a couple of minutes, and came back stating that we would receive a letter showing our balance at $0.00.

    (Side note of course: Everyone please be very careful with TurboTax — the processing for business and K-1 is not correct and very buggy).

    Thanks again Mr. Germer for the public service you perform!

    Roland

  25. Thank you Roland and thank you Mr. Germer for posting this blog. I was in the similar situation as Roland for filing late partnership return as this was my first time getting a letter for late fee. I called IRS and politely explained to them the following:

    1) First time filed a late partnership return
    2) I filed an extension back in April 2012 for my personal return and was also under the impression that the extension will also apply to partnership
    3) I told IRS that ” I assure you this was an honest mistake and it will not happen again”
    4) I requested IRS if they can please waive the penalty under 84-35.

    The agent was really nice and put me on hold to verify if this was the first time filing a late return. After putting me on hold for couple of minutes he gave me the good news that the late fees have been taken off as this was my first time filing a late return. However, please note that he emphasized that this is only “one time” waiver and IRS will not give the abatement in the future.

    Again, thank you all for posting this blog.

    PS. I called the number which was given to me on letter. The agent who picked up the phone transferred me to a “business line” dealing with business questions. Overall it took around 10-15 minutes to be put on hold as there was a wait time to speak with a business IRS agent.

    Thanks again everyone

    Jay

  26. Pingback: Partnership Late Filing Penalty – Rev Proc 84-35 and TEFRA | PDXCPA - Portland Small Businesses Tax Blog

  27. In the same boat, literally called in an hr ago and just got off with an agent. The agent I spoke to was nice, spoke clearly and took off my $1170 penalty. Apparently since I closed my business 10/13 I had file the return in 2/14 instead of 4/15/14. I explained I didn’t realize that and had always assumed 4/15 each year. I was put on hold, 3 minutes later $1170 wiped out. I can’t imagine how many people blindly paid when it just took an hr to take it off the books. Didn’t realize it would be this easy, glad I called and glad I found this blog

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