Partnership Late Filing Penalty Update

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

My original blog post – Partnership Late Filing Penalty Abatement – is one of the most popular articles here on PDXCPA, and that is due the fact that the IRS has become more and more agressive in assessing this penalty over the years.  In fact, last year I encountered some new problems in requesting abatement of these penalties, so an update on the subject is well overdue.

  • First off, the base penalty amount has been increased to $195, so if you have a number of partners or members, this has become a very substantial penalty that seems to far outweigh the offense.
  • The IRS has been denying the standard abatement letters using Revenue Procedure 84-35 – especially for clients that have requested abatement several years in a row.  In priors years, the abatement had been fairly automatic, but last year they fought very hard in some cases to keep the penalties in place.
  • In talking to fellow tax practitioners from TaxQueries.com, I found that I was not being singled out by the IRS and that many others had received similar letters denying abatement and citing new arguments never raised before.
  • The most common new argument I encountered was that the IRS claimed that they could not consider our request for penalty waiver under Rev Proc 84-35 because their records indicated that the partnership elected to be subject to the consolidated audit procedures under IRC 6221 through IRC 6233.  Upon further inquiry, the IRS claimed that a TEFRA election (Form 8893) was filed in a prior year – usually about 10 years prior.
  • The IRS agents were very uncooperative with providing me with additional information, and they simply stated they would have to request a copy of the return from their records department.
  • Fortunately, my clients keep very good records and we pulled up copies of the return that the IRS claimed had a TEFRA election.  Sure enough, the return did not include Form 8893 or any other elections with regard to TEFRA.  After a lengthy phone call, they finally agree to abate the penalties if I faxed them a copy of the complete tax return in question.
  • In talking with the agent, I found that they had been trained on some new procedures earlier in the year, and the TEFRA election was something they were looking at on all abatement requests.  In this case, their records were simply incorrect regarding the TEFRA election, but had I not had a copy of the 10 year old return to prove that it was an error, the IRS might not have been willing to abate the penalty – especially since their records department had taken over a month without finding the return.

Over the next few months, the 2011 batch of late filing penalty letters will be mailed out, so it is important to be aware of some of these new tactics being employed by the IRS.  The standard abatement letter using Rev. Proc. 84-35 is something any business owner can prepare and send to the IRS in response to an initial late filing penalty letter.  However, if you get a denial letter citing a TEFRA election or another similar reason, make sure you engage a tax professional or lawyer to fight the IRS for you.  The IRS is no longer rolling over when they get abatement letters, so be prepared.

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

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

37 thoughts on “Partnership Late Filing Penalty Update

  1. Brian, Thanks for the Update on this. I have several clients who use Rev Proc 84-35 each year. I just got off the phone with a revenue agent who claimed the partnership was subject to TEFRA.

  2. I’ve encountered the same issues with abatement requests. So now what I’ve done is incorporated an additional statement in the form abatement letter stating that the entity has never made a TEFRA election since its initial formation. That’s seems to nip the problem in the bud.

  3. I recently requested abatement under Rev Proc 84-35 for a client and received the new “TEFRA” denial of abatement. Upon researching and finding your article, I again asked for abatement with an additional statement that no TEFRA election was ever made by the partnership. Received another denial today with the following paragraph:

    “According to our records, the election under Sections 6221 and 6233, was made at the time that the partnership was formed in 1995. The records concerning your 1995 tax forms are no longer available.”

    We are treading are very dangerous waters when a government agency can say you did something and is not required to produce proof.

  4. Brian,
    I couldn’t recall the necessary bullet points for an abatement under Rev. Proc. 84-35, so I did a quick search and came across your blog. The TEFRA angle definitely caught my attention – very interesting (as was the comment from Melissa H.)
    I work at a small firm in San Diego and am now following your blog – good info. Thanks!
    Aside from tax law, my passion is writing (novels and blogging as well). I also happen to be a Timbers fan – you can’ t beat their crowds (sorry, Sounders) – I took my son to a match last year. It was a great experience. Hope they find some magic for the 2nd leg v. RSL.
    Regards,

    -Steven Sobotka, J.D., LL.M.
    author@stevencsobotka.com

    • After my 3rd letter, the Service abated the penalty. I found a couple of documents which are very detailed as to the intent of Rev Proc 84-35. I used their own documents to refute their denials and finally received abatement. I would be happy to forward those documents and a blank copy of my final request which received abatement if you would like. It looks like this i going to be an issue that they are going to dig their heels in and will require numerous requests for abatement.

    • Thanks! Definitely an issue that has become more of a problem. Fortunately, many of our clients are now filing by the deadline, but there are a few I will have to fight this battle for in the coming weeks.

      Go Timbers! Good to hear from fans that live outside the Rose City. It has been a great season! I split a pair of season tickets with a friend this year and had a blast going to the games with my wife. Definitely hoping they can pull this off against RSL and break through their diamond formation.

      I wish I had more time for the writing, but we have been keeping very busy this year. Lots of subject matter to cover, so hoping to catch up on my posts now that it is starting to slow down.

  5. HI MELLISA,
    HERE I AM ANOTHER WOUNDED ALLY BY THE TEFRA AGRUMENT, BY THE SERVICE STATING THE CLIENT MADE THE ELECTION BACK IN 1990 AND CLIENT CAN ONLY FIND A 1994 RETURN, WHICH OBVIOUSLY DID NOT MAKE THE TEFRA ELECTION. THERE ARE VERY FEW REASONS ANY CLIENT WOULD MAKE THE ELECTION. I COULD REALLY USE YOUR DOCUMENTS TO FIGHT THE GOOD CAUSE.
    ALAN L. WEITZ, CPA Standing alone in Arizona alsbar5531@cableone.net

  6. Melissa,

    Yet another casualty of this concerted abatement denial effort by the IRS. I also am interested in your cited refutation documents and blank final request. Your sharing of your successful efforts on this are greatly appreciated by all of us. My email address is wwolf@waynewolf.com.

    Regards,
    Wayne Wolf

    • I believe I have forwarded the documents to everyone that requested and provided me an email address. If I missed anyone, please let me know. And if you’d keep us all posted as to whether the documents worked for you as well. This is a very interesting stand the Service has decided to take.

      • Will greatly appreciate your sharing of sample documents. I assume it is sufficient that I leave my email in the details at the end of this comment box.

        Had my client send in a normal Rev Proc 84-35 waiver request on back in mid December 2013 to Ogden. No response from Ogden. Less than 30 days later in the second week of January 2014, my client gets a notice of intent to levy.

        This is a much more aggressive tactic that I have never seen before in my several decades of experience in handling these kinds of penalty, totally uncalled for under the facts and circumstances of my client. The effect is overt intentional intimidation.

        Thanks in advance
        Dave

      • Hello Dave!

        I agree. I think the Service is responding in a manner that is totally opposite of the intent of Rev Proc 84-35.

        I would happy to forward you the documents, but your email address doesn’t show up on your post.

        Melissa

      • Thank you for your response.
        My email is dave@storhaugcpas.com
        Or in the alternative you can use storhaug@btinet.net which I believe is what I used when I signed up for this discussion site.

        I have more than my share of these late filing partnerships.
        First, over the decades I developed a specialty of working with family limited partnerships used for gifting purposes, which means that partnerships make up a much greater than normal percentage of my total tax practice.
        Secondly, in addition the delays thrust upon many of us CPAs / taxpreparers last year due to the fight between Congress and Obama, resulting in delay of forms etc., were felt more heavily in my case, compounded by some staffing problems that I had. So we just could not get a number of partnerships done by the partnership deadline, but initially weren’t concerned because we would at least have them done by the 10/15 personal deadline, and anticipated no problems with the use of RP 84-35.

        Every partnership is a little different of course. But one that I looked at yesterday was formed in 1996, and the agent said that IRS records showed a TEFRA election. But ALL of my client records – returns, workpapers -correspondence, etc. (since I first started my practice – including back to going back to 1996 when this partnership was formed) have been digitally scanned in to my network data backup system. So it was rather easy to go back into my digital data base back to the year 1996, when I helped the client create the partnership, and for which I have continued to prepare such partnership return every year since up to the present. After reviewing 16 years of files, I found substantial clear evidence that there NEVER WAS any incorrect box checked, nor was there any other kind of filing made that would have reasonably made the IRS think that a TEFRA election had been made. So the feeling I have right now is that the IRS is telling me a BOLD FACE LIE. Actually, I kind of doubt that the Agent I specifically have spoken to is lying, but he is simply relying on whatever someone has INCORRECTLY entered into the online IRS database. Whatever, the result is the nearly the same as lying, if the agent is going to continue to argue that the IRS record is correct.

        I have a friend who is a retired attorney from the IRS. When I get a tentative response drafted, he has agreed to review it and give me some pointers. If something new comes out of that review, I will be happy to return your favor, and share such info back to you.

        Also, I am not aware that Rev Proc 84-35 has been formally superceded. In that case, we should be able to rely on the face of it, as being substantial authority. And so far I am not aware that the IRS has any better substantial authority.

        If the IRS keeps pursuing this tactic, under the right facts and circumstances, I will increasingly consider filing an initial, but tentative partnership return based on reasonable good faith estimates, just so that a partnership return is initially filed on time – – and to be correctly completed by the 10/15 individual deadline so that we have the proper final numbers for the individual return, and then shortly after 10/15, finish the final paperwork processing so that the client can file an amended partnership return. This is a technique that I have occasionally used in the past for Sub-S returns, where the Rev Proc 84-35 technically does not apply, and IRS agents have generally been even more reluctant to grant relief from late filing penalties.

        My apologies for being too “windy”

        Sincerely,
        Dave Storhaug, CPA

      • Melissa,

        I would also be interested in receiving an email with the docs to fight the IRS on this as to the intent of Rev Proc 84-35. Please forward them to: golfingcpa@sbcglobal.net

        The IRS is also going after new entities; my client of a newly formed 2013 LLC received this letter in response to our filing Rev Proc 84-35:

        “In order for us to consider penalty relief based on Revenue Procedure
        84-35, please also address the following criteria:

        The partnership has not elected to be subject to the consolidated audit procedures (See Form 1065 Schedule B line 5).”

        Wow, brazen!

      • I am just researching what to do with my penalty for filing 1065 late. The returns were filed by oct 15 of the years in question. I guess that is too late for the 1065 should have been in on sept 15.
        My tax preparer did not tell me about that, now he says just pay the big penalties and forget about it. I personally would have never waited to file my 1040 until oct if I had known that the 1065 was due a month earlier. I am learning the hard way. A nice IRS agent i called said to use the 8435 review procedure, I answered yes to all the six review questions on the review. It seems that my not be enough. I would like to see your documents if that would be possible. My email address is jerrywieber@yahoo.com. Thank you.

      • Jerry – see the new updated posted at http://pdxcpa.wordpress.com/2014/02/02/partnership-late-filing-penalty-2014-update/. It has the documents from Melissa available for download as well as the most recent information on the topic.

        Many people do not realize that the 1065 extended due date is 9/15, so it is understandable. You should be able to get that abated if you stick to you guns on Rev Proc 84-35 (assuming you meet all the factors). As long as you meet the requirements and are persistent with them, they are going to have a hard time denying abatement unless they go the TEFRA route.

  7. Melissa – thank you for all your help in distributing this information to everyone! I really appreciate it.

    This is a very interesting issue and I would like to hear how the IRS responds, so everyone – please share your outcomes, as I think it is a good resource to practitioners and small business owners.

    I have been receiving a number of calls on this issue, so as soon as I have the time, I will update my posts on this issue.

    • I am helping a friend with this very issue and this blog has been very helpful.

      Has anyone mentioned to the IRS the cautionary note contained in the Internal Revenue Manual8.19.1.6.3.1 (10-01-2013) which reads: “Caution: The IDRS Transcript commands BMFOLE and ENDMOD have a TEFRA election indicator. Unfortunately, this indicator is not always accurate. The examining agent should be consulted if the TEFRA election indicator is positive but the TEFRA rules have not been followed.”

      It seems to me the IRS has acknowledged within its own audit guidelines an issue with these elections.

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

  9. The documentation I have found regarding Rev Proc 84-35 says you need to fill out “the form below” but there is no form. Does anyone know what form I need to send in?

    • Are you referring to the memo dated 8/1/01 from the Office of Chief Counsel? If so, they had recommended that the IRS provide forms that taxpayers could sign with the 6698 penalty letters, but they never did this. No form is needed – you just write a letter stating that you meet all the requirements and requesting abatement.

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