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the concepts behind the Rev Proc may work in your abatement request letter to the IRS, so try using the concept – just do not quote the Rev Proc.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

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