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.

Attention S Corporation and LLC Procrastinators

There is less than a month until the final extended deadline for 2011 S corporation and LLC tax returns, and it is crucial you file on time to avoid late filing penalties.  If you have not sent in your 2011 data to your CPA or tax preparer, you might want to work on it this weekend instead of enjoying the summer weather (or lack thereof if you are in Portland this morning).

I have written numerous posts about the S corporation late filing penalty that can only be abated if you have no prior late filing history, and the partnership penalty that the IRS has recently been making more difficult to abate.  If you have never read up on this topic or had to deal with this issue, please take a few minutes and click on the links above to read about the penalties, as they can amount to thousands of dollars in unnecessary, non-deductible costs for your business.

Even though there are automatic abatement procedures in place for entities taxed as partnerships, you should not assume that if it has worked for you in prior years that it will work in the future.  Last year, the IRS made changes to their internal procedures with regard to how they dealt with late filed partnership returns, and I had many abatements challenged or denied that had been approved in prior years.  You can read about some specific problems on my TaxQueries.com post, but I believe the IRS will continue making it more and more difficult for partnership filers that continue to file late each year.

Make finishing your 2011 accounting work a priority this weekend!  Not only will your tax preparer appreciate it, but not having potential penalties hanging over you is even better.

 

Update on S-Corporation Failure to File Penalty

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 update.  It is an important issue now that the the first few rounds of IRS abatement request 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 penalty.

Just to quickly review the basics from the previous post, this penalty is charged to S-Corporations that failed to file their 1120S return timely, which means you either failed to extend your return and filed after the March 15th deadline, or you extended but did not file by the September 15th extended deadline.  Other details of note on the penalty:

  • Begins for returns filed after 12/20/07
  • $85 per shareholder per month late ($89 for returns due after 12/31/08)
  • Applies to any entities taxed as an S-Corporation

I recently sent an abatement letter for a client that used some of the language from Rev Proc 84-35, and even though the IRS abated the penalty, they made a point about the fact that they did not base the decision on any reasoning from 84-35.  In the response letter, the IRS stated 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 thrill of getting the penalty abated quickly faded as I realized that this is not good news for S-Corporations if a Rev Proc similar to 84-35 is not forthcoming.  Based on recent reports of plummeting Federal tax revenues, I doubt we will see a Rev Proc anytime soon that would provide automatic abatement for small S-Corporations like we have for partnerships, so I would definitely suggest a few things with regard to requesting abatement of this penalty:

  • If you request abatement of penalties, do not use any language from Rev Proc 84-35 – you are just inviting a short lecture from the IRS.
  • If you have a history of timely filing and paying, state this in the letter as the reasoning for your abatement request along with an apology or two.
  • If you do not have a good history – hopefully you have a sad story of unusual circumstances that will work as reasonable cause.  In my experience, the IRS rarely abates penalties for reasonable cause.

Lastly – in the future, FILE TIMELY!  March 15th is the deadline and if you are not going to be able to file by that date, make sure you call your CPA or accountant to make sure an extension is filed.

If you received a penalty notice and would like assistance in dealing with the IRS, feel free to contact us to find out more about our services.

Partnership Late Filing Penalty Abatement

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

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.