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.

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.