Back in December of 2007, the 110th Congress passed HR4351 or the “AMT Relief Act of 2007″, which was the aftermath of the showdown regarding alternative minimum tax that I posted about at the time. The bill had a lot of small print regarding new revenue raisers – one in particular: Sec 223 regarding failure to file penalties for S-Corporation returns.
For returns required to be filed after 12/20/07, there is a penalty of $85 per shareholder per month that the IRS can charge ($89 for returns due after 12/31/08). This means that if you filed your 2007 S-Corporation return after 3/15/08 (or 9/15/08 if extended), then you either have received an IRS penalty notice or will soon enough. I personally have not seen one of the notices yet as our firm filed everyone timely; however, if you have received one, please let 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 letters.
I had a comment on my recent partnership penalty post asking if Rev Proc 84-35 would work for getting S-Corporation penalties abated, and while my immediate answer is “no” since 84-35 pertains particularly to 1065 returns, the concepts behind the Rev Proc may work in your abatement request letter to the IRS, so try using the concept – just do not quote the Rev Proc. I did read the actual IRS code on the new penalty, and according to IRC Sec 6699(a)(2), if “reasonable cause” can be shown, then they may abate the penalty. This is usual language with many of the IRS penalties, so this is not much help. For now, I would write a solid letter outlining the unusual events outside of your control that prevented you from filing by the deadline and emphasize that you are a small S-Corporation with less than 10 or less shareholders and that all shareholder timely filed their returns with their share of S-Corporation income and deductions. If they deny abatement, try again – there are many, many different employees at the service centers and persistence can pay off.
I will let you know if I hear about any other strategies that emerge as practitioners try their hand at abatement requests with the first round of penalty notices. If you received a penalty notice, call your CPA or accountant as ignoring these notices will only create more problems.
Hi, just a comment to let you know that I have carried out your ideas from the post.
Will let you know how I get on
Hi, just to let you know that I have done as you have said – will see what happens.
Hi Dave,
I just wanted to find out if you had any sucess with the abatement of the penalty for filing late ( S-Corp)
Thanks for this guidance. I’m dealing with my first one of these today. The best part was that when I called my client about it, he said “But we filed it along with the 1040. Why wasn’t it timely?” So, my reasoning that the owners weren’t aware of the March 15 deadline seems to fit.
Of course, I put that I’ve discussed this with them and that they will file timely in the future. I like your reasoning that something similar to 84-35 could apply. I think that makes a lot of sense, and hope the IRS sees it that way, too.
RE: late penalties for S-Corps. Doesn’t code sec 6699 (a)(1) – specifically quoted in the now common CP162 Notice appear to be a REPEALED section of the code?
And, doesn’t it seem to particularly relate to 409, with regard to a qualified investment?
What am I missing here? How does this get validly translated into an S-Corp penalty?
Am I reading the incorrect code section?
See my comments on the related posts regarding Partnership penalties and 6699a. Hopefully the last comment at the bottom will answer your questions.
Here is another resource for ideas on what to put in the abatement letter: http://bit.ly/rGnlo
Anyone hear back from the IRS yet regarding their abatement request? I am very curious now that I need to write an abatement request letter.
Came to this blog looking for information on a decent wage for S-Corp employee and owner. Thanks for the info.
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.
I received a reply from the IRS on one of my S-Corp penalty abatement requests for a client, and I thought I would share the results.
They did remove the penalty, but they made sure to state that the abatement was”based solely on the fact that you have a good history of timely filing and timely paying”. They also stated the removal was a “one-time consideration” and that future penalties would only be abated if the information met the “reasonable cause criteria”.
The last comment from “m” from the IRS service center is correct, the IRS is making a point about the fact that they are not basing the decision on any reasoning from 84-35. I would not advise using any of the wording from 84-35 or the AICPA letter that I listed earlier. I would just stick to a “I am sorry” letter that emphasizes your good history of timely filing and payment (if it applies).
It is unfortunate that a Rev Proc for S-Corporations similar to 84-35 has not been issued like the AICPA suggested; however, given the latest release about the drop in collection of taxes by the Treasury due to the economy – it is understandable. Fees are unfortunately becoming more and more of a revenue driver, so you definitely want to make sure you file and pay timely. Also, do not forget to file an extension. It can now be a costly mistake.
This is definitely an advantage for LLCs and partnerships vs. S-Corporations – I’ll have to add it to the Round 2 blog post I am working on.
[...] – Parsons & Grinage CPAs I had previously discussed this issue in my 1/22/09 post entitled “S-Corporation Failure to File Penalty”, but there have been so many comments and updates since January that I felt I should post a formal [...]
How do I remove/reduce IRS penalties and Interest?