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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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.