S-Corporation Failure to File Penalty

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the concepts behind the Rev Proc may work in your abatement request letter to the IRS, so try using the concept – just do not quote the Rev Proc.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.

About Brian Germer, CPA

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

38 thoughts on “S-Corporation Failure to File Penalty

    • Hi Dave,

      I just wanted to find out if you had any sucess with the abatement of the penalty for filing late ( S-Corp)

  1. 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.

  2. 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?

  3. 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.

  4. 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.

    • Brian,

      I’ve read your 8/14/09 update on this subject and just now forwarded you an email update from the AICPA with reference to their proposal to the IRS (ie. nothing yet)

      Since your 8/14 update, do you have any further “Do’s and Don’t” suggestions to get a penalty abated ? thank you

  5. Pingback: Update on S-Corporation Failure to File Penalty « PDXCPA – Portland Small Businesses Tax Blog

  6. I received on of these IRS S-Corp penalty letters on 11-20-09 in the amount of $1,424.00 for tax year 2008.

    I set up an S-Corp in 1990 in case I ever went into the consulting business. the S-Corp was last used in 2005 during a six month consulting period. The S-Corp has not been used since, so for each of the three years 2006 – 2008 each 1120S was filed with $0.00. For tax year 2007 the $0.00 1120S was filed on time (03-12-08). For 2008, I did not file my 1120S on time, nor did ask for an extension. Truth is, I forgot all about the 1120S since there was no income. I filed an extension for my 2008 1040 and didn’t give another thought about the 1120S until I started filling out my 1040 in October.

    The calculation the IRS used was the period from March 2009 through October 2009 (eight months) x $89 per month x 2 shareholders (wife and I). Yes, I was late in filing in 2008, I just simply forgot because nothing was due. Nontheless, $1424.00 is a stiff penalty for an S-Corp with no taxes due and without warning. The pealty is due by Dec 21st, and I will send it in to avoid further penalities, but I do plan to file an abatement request on the grounds of showing reasonable cause; I was on-time the previous year, there was $0.00 on each 1120S for the past three years, I always file my 1040 on time (either by Aptil 15th or within the extension period), and the penality assessed seems harsh for an S-Corp with no revenue. I’ll let you know how it turns out.

    As a side note, I find it odd that the IRS sent me a notice in April saying that quarterly 941 forms are no longer required since my S-Corp has no tax due for over four quarters, but then they stick me with paying a $1424.00 penalty, with no notice, when my $0.00 1120S is late.

    • I would strongly recommend not sending the payment. Instead, just send the abatement request in response to the notice.

      In my 10 years of experience in dealing with the IRS, anytime someone sent money to them and requested abatement later, the IRS usually denied the request. If they didn’t deny the request, the were very slow in getting the money back to the taxpayer. I know you want avoid further penalties from accruing, but it sounds like your history of timely filing is good enough for a fairly straight forward abatement. I would be shocked if they did not grant abatement for you. Just write a good letter citing your history and the reasons for the failure to file.

  7. I have a mal s corp my son has been sick since March of 2007 which resulted in 2006,2007, 2008 returns business and personnal being late
    Got a notice of late s corp fileing for$1,958.00
    My son Has been in 15 hospitals since May of 2007 for psychiatric issues

    Do you think they will waive this fee its me and my husband as the shareholders

    Your advise would be appreciated
    Thank you

  8. Hi, some very helpful info here. Thanks. Brian, do you have any thoughts on this situation. S corp incorporated in late 2008. Nothing was ever done with it. It just sat (no bank account, profit, loss, revenue, etc.) until being dissolved with the state where it was incorporated a month ago, after being ‘prompted’ by that state to file returns. The IRS has never said anything about this entity. I’m not sure what to do, if anything, at this point. Please help!

  9. I formed an LLC and was granted an S-corp status in starting 2008. I had no business activity for 2008 or 2009. I did complete my bus taxes for 2009, but did it late, 4-15, when I also completed my personal 1040. I recently received the penalty letter for late filing my ’09 scorp taxes. I still have to file my ’08 bus taxes which again are $0, however I was unaware of the penalty until I received this penalty letter. This is a small s-corp with $0 business activity for both ’09 and ’08. Hopefully some good business will come my way this year, but this penalty does not help and now tht I am aware of the penalty I am worried what the penalty will be for my unfiled ’08 return.
    I am Interested in your thoughts on this….. Very new to the business thing and doing it on my own. I am finding there is a very steep “expensive” learning curve. Thx in advance. Matthew

  10. I have an interesting situation that is related. An s-shareholder was basically ec-communicated from corporation, which has not filed 1120S for several years. He had to expend money for corporate expenses, but was unable to submit expenses for reimbursement, so no pass through. How can he deduct these expenses?

  11. Soon to be something like $185/month/shareholder. WOW: 2 shareholders for 12 months = $4,440.

    Just a quick question for those with S-corp and no activity. If the company does not have any assets, could you just shut it down and start a “new” one with a new EIN. Service can only go after the defunct company for the penalties and if it’s gone, I guess there is really no one to collect from? No?

    BTW – I personally do not think the service should be able to assess these kind of penalties without notifying the tax payer of the problem and giving them a chance to rectify the problem. I think these penalties are insane.

  12. Any updates on success in waiving the S-Corp penalty? Is the best phrasing still an “I’m sorry” type deal with no reference to rev. proc. 84-35?

  13. My S corp is being dissolved this year and has no money. The IRS won’t abate the penalty for late filing in 2008 and 2009. Can the IRS come after the shareholders for the payment of the penalties? If so, how do they have the authority to do so.

  14. “m”‘s comments are spot on. IRS agents are people too, be nice and they will be nice back. I cannot tell you how many times this has worked for me. I consider it to be THE reason I get good results for clients when it comes to dealing with taxing agencies.

    You’re not dealing with American Express customer service here. They have to be nice and solve your problems no matter how you act. (Although why not be nice anyway!?) This is the government. They have no incentive to make sure you’re happy other than their own want. Of course agents (and their bosses) have a lot of discretion over what they do and don’t do for you.

    I will spare you the details, but I cannot tell you how incredibly importance having some tact and just being nice is when it comes to getting results in this business.

  15. I nearly vomited this morning. I opened my mail to find $5000 in fines on two Sub S companies I have. I had to close them due to the recession, and with both my wife and I being laid off in 2009 from our jobs, we had our hands full trying to stay “alive”. After 2 years of hell, we finally got around to filing.

    Neither company ran a profit, they both lost significant money as a result of us going out of business. This is part of the reason we did not file, because we had no idea of these fines and we knew no taxes were owing. Now after 2 years of being unemployed, we are faced with a Tax penalty bill on these two companies for My wife, myself and child as shareholders for more than $5000.

    What the hell is this world coming two? I am so disgusted with how small businesses are treated, and the monumental uphill climb against all odds, that I just want to leave this country and run away.

    Is it any wonder that small businesses have all but given up.

    How can “OUR” government justify such abuse of power?

    • Mike,

      You’are not alone. I have an SCorp with 3 shareholders (me and my 2 adult choidren) with less than $20k gross revenue. IRS had assessed $4168 penalty for late filing. Never late before even w/ my personal income tax returns. My mother went in & out of the hospital during the months of March through July until she finally rested in peace. Then get a chance to catch up with my paperworks, filed 1120S around September, got nasty letter from IRS on December.
      I sent IRS request for penalty abatement with my reasons including a copy of my mother’s death certificate. NO SUCCESS. I feel like being betrayed by my own government. Yes, it is sickening that I wanted to vomit everytime I pick up that IRS letter.

    • Dear Mike, I am also dealing with the same situation. I went through divorce and relocated to oversea. I did not know that I needed to file 1120S for 0 income s corp. I received $11310 penalty from IRS. IRS never sent me a warning. I found out this rule accidentally and immediately filed the return for all previous years. 3 months later I received the penalty. Haha. The penalty came on the day that I am laid off by the company. I thought that I was going to suicide, because nobody can reason with the government machine. You don’t even know how to fight. In Germany, you can walk into the tax office and make appointment and they warm you before any action posts on you.
      This country treats middle class like milking cows. Where is the democracy? Who hears our voice? Who cares about the hard working people? I think the small business owners should have a union where our voice can be heard like in Germany.

      • Because of the excessive penalty charged for late filing, I will never let a husband and wife each be given a Schedule K-1, that would only double the penalty if it should ever be assessed, since the penalty is based on number of K-1s multiplied by number of months late (maximum of 12). Even in community property states such as Texas, on the Form 2553 election, I show one spouse as 100% owner, the other spouse as “50% owner under community property laws.”

        As David Rothfeld pointed out in 2012, the penalty is owed by the company, not the individual owners. Sometimes it is cheaper to form a new company and move on. But I would expect the IRS to waive late penalties when there is NO ACTIVITY during the year or years.

  16. Mike, I am not aware of any provision which allows the late filing penalty to be assessed against you personally. When it comes to payroll taxes, there is a “100% Trust Fund Recovery Penalty” to deal with unpaid payroll taxes withheld from employee payroll. But there is no such provision for late filing penalties. Therefore, if the corporation is dead and empty of any assets, I would let the notices just keep coming and ignore them. They will always be addressed to a defunct corporation with no assets, and not to you or your wife. Don’t let the notices bother you and eventually, they will stop coming. They can’t get blood out of a dead corporation.

  17. Definitely don’t send in the money and then hope they’ll refund it. It makes it harder to claim you don’t have it or can’t afford it. Also, similarly, I had applied for a occupational license and after some back and forth with the licensing department of the government I was dealing with, I decided I could not afford to continue with the licensing process. I had made the mistake of paying for a portion of the fees. Well, they didn’t refund all of it back to me even though I opted not to get the license. They just invented a reason to snipe a piece of the money and send me the rest. That’s the California Department of Housing and Urban Development for you.

  18. Last December, 2010, i received a notice from the IRS stating they did not receive my 941 or w-2 for tax year ending 2007. I sent them a letter along with copies of the forms i did submit (no delivery receipt) I stated, here are the forms i filed when they were due. and that all taxes were paid and that the s-corp closed in 2008. after almost 1 year to the date, they sent me a notice that i owed 11k and i had 10 days to pay it our they would levy my assets. concerned with this I called theirs and explained I did originally submit these and the taxes were paid on time and I would like to know what this amount was for. After reading through my records the agent stated that it was a penalty for filling late. Any suggestion on getting rid of this penalty? I really dont have that kind of money to give to anyone.

  19. Mike, I’ve been reading blogs today since I got sacked with 1120s late filing fee as well. In follow up to Tom’s response read this: http://smallbusiness.chron.com/can-irs-after-shareholders-corporation-owes-tax-17289.html

    It is ironic – I actually thought my company was closed in late 2009, and in December 2011 I filed 1120s for 2010 since this was listed as an option to restore the EIN back to active state. And then bam – $3500 late filing fee. Unbelievable! Funny thing is that I didn’t receive any letters or notices that anything was late.

    I will now file 846 and tearful letter hoping to get this reversed.

  20. Just got a penalty notice for $3510!

    The 2 man S-Corp had been operational for a couple years and had zero profits. Revenue was in the $100’s of dollars. Of course no taxes were due. Operations ceased in April. We were unaware that a return was supposed to be filed 3 months after termination. No official termination paperwork was even filed. We just stopped doing anything with it and postponed the closing paperwork till when we thought returns were due.

    We filed the return on April 15 (didn’t know s-corp was required to file on March 15) and elected a “short calendar year” ending in April as that is when operations ceased. The IRS is now charging penalties of $195 per shareholder per month from July 15.

    This seems ridiculously punitive.

    • I had s corp till 2010 july. its now closed since then. I had late filing for 2010 bcoz of my lawsuit. which was my intentional mistake. I knew i would be penalized for it. but i just got letter from IRS that i didn’t file my 1120s for 2008, which was surprise for me. i find out from my accountant and he said 1040 was submitted electronically but 1120 was not file. So long story short I have to pay penalty for 2008 and 2010 which is $2300 and $1950 respectively. Now irs has waived fees for 2008 as first timer but they deny for my 2010 penalty. In 2010 i didn’t owe any money to IRS, it was just refund in my personal tax return. My question is since my corporation is closed, should I worry about it penalty for corporation. Also since I had Lawsuit liability of >$100000 on me I m already underwater. So if i don’t pay IRS can they come after me on my personal name ? pls sugggest me. thanks

  21. I m sorry i didn’t mean to reply to Daniel’s comment. I have question to ask which by mistake went in danile’s question. I hope I m posting right this time.

    Here is I ask my question again, if any body can advice.
    I had s corp till 2010 july. its now closed since then. I had late filing for 2010 bcoz of my lawsuit. which was my intentional mistake. I knew i would be penalized for it. but i just got letter from IRS that i didn’t file my 1120s for 2008, which was surprise for me. i find out from my accountant and he said 1040 was submitted electronically but 1120 was not file. So long story short I have to pay penalty for 2008 and 2010 which is $2300 and $1950 respectively. Now irs has waived fees for 2008 as first timer but they deny for my 2010 penalty. In 2010 i didn’t owe any money to IRS, it was just refund in my personal tax return. My question is since my corporation is closed, should I worry about it penalty for corporation. Also since I had Lawsuit liability of >$100000 on me I m already underwater. So if i don’t pay IRS can they come after me on my personal name ? pls sugggest me. thanks

  22. Pingback: Attention S Corporation and LLC Procrastinators | PDXCPA – Portland Small Businesses Tax Blog

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

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