Partnership Late Filing Penalty – Rev Proc 84-35 and TEFRA

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.

The Basics:

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:

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.

Good luck!

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/

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

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

15 thoughts on “Partnership Late Filing Penalty – Rev Proc 84-35 and TEFRA

  1. Pingback: Partnership Late Filing Penalty Update | PDXCPA - Portland Small Businesses Tax Blog

  2. Pingback: Partnership Late Filing Penalty Abatement | PDXCPA - Portland Small Businesses Tax Blog

  3. In your personal experience, will the IRS enforce the late filing penalty to begin with for an inactive partnership filing a zeroed out less than 60 days late? Thanks in advance for any insight you can provide!

  4. Doing some research on small partnership exceptions and am having a hard time finding anything to indicate if you qualify for the small partnership exception do you still have to file a partnership return? If the IRS gives a penalty abatement under Rev Proc 84-35 do you still need to file the return?

      • Brian, You made a number of good point. I disagree on two points though:
        1) form 1065 does not have to be filed generally if the domestic partnership/LLC neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes.

        The LLC-partnership clarification was added very recently.

        2) the TEFRA argument is a Red Herring. IRS has misinterpreted the scope and purpose of section 6231(a)(1)(B). Section 6231(a)(1)(B) was enacted as part of TEFRA in an effort to provide unified partnership audit and litigation procedures. These procedures are completely unrelated and have no bearing on the application and scope of section 6698.

        In support of my claim, please see advisory No. 200135029 dated 8/31/2001 from the Office of Chief Counsel which discusses and clarifies that regardless if a section 6231(a)(1)(B) election was made or not, that the criteria for penalty waiver is that the taxpayer is a domestic partnership comprised of 10 or fewer partners, etc. as stated in Rev. Proc. 84-35.

      • Thanks for the comment. True, you do not technically need to file if there are no income, deduction, or credit amounts, but I rarely ever see such a case in real world situations. Usually, there is always some amount of depreciation expense from assets purchased in prior years, or at least some balance sheet activity and changes to capital accounts – which I personally believe should always be reported. I get really frustrated with tax preparers who take shortcuts when preparing 1065 returns and do not report the balance sheet on Sch L. It only creates problems and more work for the client down the road, and it is just lazy of the tax preparer, as you should take a balance sheet approach to make sure the income/expense data is correct.

        Thanks for the recommendation on advisory No. 200135029 – I will check it out. The IRS has misrepresented much with this whole issue, but when you are dealing with them, you are often dealing with a agent who has been trained on specific procedures and is not going to waiver on their position, so for practical purposes I found it much easier just to prove to them that no TEFRA election was made. If I end up with some spare time someday, I will take up arguing with them about it, but last time I tried that there was shouting on both ends and they refused to acknowledge they were wrong. Oh well, back to the returns…

  5. Any thoughts on the IRS reaction to an abatement request where I can answer all of the questions as yes except the proportionality question. My partner and I are 50/50 except that I signed personally on the debt. The LLC/partnership has negative equity so he has no basis to deduct the loses so they all go to me.

  6. Is there any code section that would allow for a late filing penalty on disolved partnership to be assessed on the individual partners?

    • I don’t believe so. If you look at Section 6698 (c), it clearly states that the penalty is assessed against the partnership. However, I have seen the IRS collection dept assess W-2 and 1099 late fees to owners by structuring them as civil penalties, so I guess it could be possible if they really wanted to go after collection of the penalty. I believe some commenters on my blog had success when notifying the IRS that the partnership was already dissolved and had no remaining assets, so I would definitely try that angle.

  7. Two questions if you happen to catch this. I am just starting the battle of a claimed 1997 TEFRA ( or “elected consolidated audit procedures”.) Q1) #5 of the requirements-Each partner’s share of each partnership item is the same as his share of every other item? Must all Profit, Loss, & Capital be 50/50 or 33/33/33, or 25/25/25 on the K-1? Q2) For all 4 late years I am working on none of the partners (husband, wife, 2 children) never owed tax, nor had a refund coming. What is their deadline for “timely filed”? Due date + 2 years for refund?

    • As to Q1 – it just means you have to share each item of flow through income, deduction, and credit based on the same %. You can have different capital % and your income/loss percentage, so that shouldn’t be a problem. I have never had this requirement cause me problems, because even if we make some special allocations to arrive at the net number, we still report so that each item is based on the same %.

      For Q2 – timely filed would be 4/15 without extension and 10/15 with extension, so if they did not file by the deadline, the IRS could disallow abatement. That I have confirmed in when talking with the IRS, so I do not think that meeting the statute of limitations is going to work.

      If you cannot get abatement under the Rev Proc, you may just have to try reasonable cause. Multiple years are tough to get abatement, but I would try every option available.

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