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.

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About Brian Germer, CPA

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

5 thoughts on “Update on S-Corporation Failure to File Penalty

  1. Pingback: ask matt cpa » Tax filing fines

  2. A question, loosely related to this post:

    If an S-Corp registers/organizes with the Sec of State in late 2009, but doesn’t start “doing business” (i.e. no revenue) until 2010, are they required to pay the OR $150 excise tax for tax year 2009? I would imagine the answer is “no”, but I can’t find any publication/form that states that clearly.

    Thanks…

  3. There is a difference between doing business and having no revenue. Many late year startups have significant business activity without making any revenue, but this is still reportable and subject to the applicable minimum taxes.

    However, If you can say that you had no activity in 2009 and did not actually activate the business until 2010, then the answer is no and you would not even file in 2009. This happens quite frequently with new companies that register/organize late in the year. The date of incorporation or organization can be in November or December, but they do not actually start business until the following year. I have never run into a problem with this. Although, if you have payroll, the IRS will come looking for a 4th quarter report unless you indicate on your EIN registration that the first payroll will not be until 1/1/10.

    Good question! Thx

    • Brian,

      I have this very same situation with a client that organized late in 2009, completed all of the S-Corp setup filings including Form 2553 with effective date 11/2009, but had “no activity” until 2010. While I know you were specifically addressing the Oregon excise tax question in your reply, given the new penalty for late filing of the 1120S, are you suggesting not to file the 1120S for 2009 ? I typically would have timely filed a “Dormant Return” in a “late setup” first year. However, this client did not come aboard until late and he would be be in a penalty situation if I filed a “Dormant Return” now. However, and I appreciate your input on this, it seems not filing at all would save everyone a lot of work as opposed to filing a late Dormant Return late and risking that the IRS would assess the late filing penalty ? Please RSVP. Thank you.

  4. HELP!

    I didn’t file my returns for 2007 and 2008 until 3 months ago. I still have to file 2009 and 2010 (but 2010 isn’t late yet).

    I just received the letter for 2008 saying I owe $2136.00. I have two questions:

    1) Under section (c), it says, “The penalty imposed by subsection (a) shall be assessed against the S corporation.” Does this mean that if I have dissolved the corporation (which I did in 2010), there is no way they can collect the penalty since there is no longer a corporation? (In other words, will they come after me/husband as the shareholders?)

    2) Since 2007, my parents have both been seriously ill and I have been making trips back/forth to CA (from GA) on a regular basis as I have no siblings to care for them.

    Plus, my CPA passed away in 2009 – and his partner never contacted his clients when he was ill to tell us to find someone else.

    I am going to make a request for abatement for 2008 (I will have to do one for 2007 as well when it arrives – which should be anytime.) Since 1991, all my returns had been on time.

    First, are those reasons stated above sufficient?

    Second, do you think I stand a chance of getting abatement for all 3 years (and I’m assuming 2009 will get hit as well)?

    Third, will having a CPA fight this battle for me be advisable? (If so, what is your fee?)

    Thank you!

    Cindy Brock

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