I have written two prior posts on this issue, and there has been a lot of discussion and important contributions from readers, so I wanted to compile all the information in one post.
Partnerships and entities taxed as partnerships (LLC, LLP, etc) are required to file annual returns by 4/15. A five month extension is available, making the final deadline 9/15. Strict penalties are assessed by the IRS if you file late.
The penalty is currently $195 “per partner, per month” that the return is late. This can add up really fast, and average late filing penalties result in several thousand dollars of non-deductible fees that the IRS is making more and more difficult to get removed.
It does not matter if your business taxed as a partnership did not make any money or never really took off – if you registered for an EIN# or have filed previous returns, you need to follow through and returns annually. The IRS is not going to listen to they type of excuses.
Abatement Option #1 – Rev Proc 84-35
If the partners or LLC/LLP members filed their personal returns timely (4/15 or extended and filed by 10/15), then you may have a get out jail card that has been available for over a decade now and provides automatic penalty abatement.
Here is the complete list of factors:
- The partnership has to be a domestic partnership,
- have 10 or fewer partners (husband and wife and their estate are treated as one partner),
- all partners have to be natural persons (other than a nonresident alien) or an estate of a deceased partner,
- each partner’s share of each partnership item has to be the same as their share of every other item,
- all partners need to have timely filed their income tax returns, and
- all the partners need to have fully reported their share of the income, deductions, and credits of the partnership on their timely filed income tax returns.
If you meet all these requirements, your first response to a partnership late filing penalty letter from the IRS needs to look like this sample letter.
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.
Important! This does not work for S corporations and LLCs taxed as S corporations. A similar Rev Proc for automatic abatement was unfortunately never created for them. For more information, read my post on S corp late filing abatement.
Abatement Option #2 – The TEFRA Complication
A few years ago, the IRS was looking to raise revenue (they have lavish parties in Disneyland to pay for) and employed a new tactic to reduce partnership late filing penalty abatements. They found that if a partnership had filed a TEFRA election, that they would not be eligible to use Rev Proc 84-35 to request abatement. Suddenly, many CPAs who submitted standard Rev Proc 84-35 abatement requests were receiving denials with the IRS claiming the client had filed a TEFRA election.
For all the background on this complication, read my penalty update blog post, but the short story is that the IRS would claim the election was filed clear back in 2002 or earlier, and the client had to dig up a copy of the tax return to prove the election was not made or put together a letter – signed by all partners/members – stating that a TEFRA election had never been filed. Even then, it often took many letters back and forth or messages on the now defunct IRS eServices resolution service.
I have personally dealt with this issue several times and was able to get abatement in each case; however, I have not had to deal with it in over a year. Fortunately, some PDXCPA blog readers have had some more current experience, and there was really good information shared in the comments section of the prior posts. Specifically, Melissa F. Hill, CPA provided a sample abatement letter and backup documentation that became a popular request on this blog. The documents she has been emailing to readers are available below:
- Sample abatement letter – TEFRA and Rev Proc 84-35
- TEFRA Election Memorandum
- Rev Proc 84-35 Memorandum
I like Melissa’s sample letter, as that is how you should frame you argument – cite Rev Proc 84-35 and then maintain that a TEFRA election was never filed and request they provide their proof of the election. A letter signed by all partners maintaining that the election has never been filed helps as well.
Sometimes they will respond with a tax year that they claim the TEFRA election was made in, but then they will claim that it will take them awhile to get a copy from archives. If you are organized and have a copy of the return, send them a copy and continue to maintain your assertion that the election was not filed and that Rev Proc 84-35 should apply. You may have to be persistent and put up a strong fight for abatement, but keep trying and do not let them bring up reasonable cause.
Original post 1/5/09 – http://pdxcpa.wordpress.com/2009/01/05/partnership-late-filing-penalty-abatement/
Update post on TEFRA 10/1/12 – http://pdxcpa.wordpress.com/2012/10/01/partnership-late-filing-penalty-update/