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.
Does this pertain to S corp’s
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!
with regard to Question 5, How does the IRS define timely?
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.
[...] me know. This is the first round of the notices and strategies have not been tested like with the partnership penalties, so I am curious as to the wording of the [...]
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.
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!
Is an LLC handled like a partnership by the IRS??? Can 84-35 work for an LLC??
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.
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.
It should work for both years.
I have never had a problem with abatement as long as the company meets the qualifications. We had LLCs that were late almost every year and the penalties were all abated.
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!
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.
[...] responses have been sent out and the fact that we still do not have a Rev Proc similar to 84-35 (automatic abatement for partnerships) issued to address this [...]
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?
Not to my knowledge. If a return is properly extended or filed by the due date, then you should not get the penalty notices.
I would just send them copies of the extension ACKS or some proof that the efiled 7004s were accepted. It should be a fairly automatic correction.
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.