Uh-Oh, I Forgot to File (or Filed Late) My Partnership or Subchapter S Corporation Return!

Uh-Oh, I Forgot to File (or Filed Late) My Partnership or Subchapter S Corporation Return!

The IRS late filing penalties start the first day after the return is due. So what’s the big deal? Partnerships and S corps don’t typically owe tax so there shouldn’t be a late filing penalty….right? WRONG!!

The penalty is, in fact, a failure to file penalty and it’s $210 per month per partner, or $200 per S corp shareholder up to 12 months total!! (Example: Two partners, 12 months late filing….penalty = $4,920!) There is also a $270 penalty for failure to furnish a Schedule K-1 to an owner on time, and the penalty is higher if intentionally disregarded!

Regardless of whether your entity is a partnership or S corporation, or an LLC taxed as a partnership or S corporation, your tax penalty will grow the longer you wait to file the return.

If you cannot meet the filing deadline, an LLC, partnership or S corporation can be granted a 6-month extension of time by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax Information, and Other Returns. You will not be penalized for filing late. Calendar-year partnerships and S corporations have a March 15 due date to at least file the extension….so what happens now that we’re well past those dates?

Let’s get that client out of these penalties…(ABATEMENT)

Rev Proc 84-35 (for Partnerships—NOT for Subchapter S Corporations)

If the partners or LLC members filed their personal returns timely (April 15, or extended and filed by October 15), then you may have a good alternative, which has been available since 1984 and provides automatic penalty abatement.

Here is the complete list of factors:

• The partnership has to be a domestic partnership,

• It must have 10 or fewer partners (husband and wife or their estate is treated as one partner),

• All partners have to be natural persons (other than a nonresident alien) or an estate of a deceased partner,

• Each partner’s share of each partnership item has to be the same as their share of every other item,

• All partners need to have timely filed their income tax returns, and

• All partners need to have fully reported their share of the income, deductions, and credits of the partnership on their timely filed income tax returns.

If you meet all these requirements, the above factors are your response to a partnership late filing penalty letter from the IRS.

More recently, it seems the IRS has been ignoring the rules of Rev. Proc. 84-35, as they have been trying to shift the discussion of penalty abatement to “reasonable cause.”

This is not necessary! Rev. Proc. 84-35 actually states if your client meets the bullet points outlined above, then the penalty SHALL NOT APPLY—that’s much different from the IRS accepting your explanation as reasonable cause. Even if you claimed relief under Rev. Proc. 84-35 several years in a row, don’t let the IRS try to claim that they can’t abate the penalty or demand you must make a reasonable cause argument—keep citing Rev. Proc. 84-35 until you get your abatement.

Penalty Relief For S Corporations (You may note that an S corporation is not a partnership)

To begin this section, it’s important to note this distinction because Rev. Proc. 84-35 only applies to partnerships and not to S corporations.

So what can you do to avoid the same $200 per month per shareholder penalty for late filing that S corporation return?

The answer requires a bit of luck and sympathy (but only perhaps once) from the IRS.

I will start by saying that your abatement request can begin with the standards outlined for partnerships in Rev. Proc. 84-35. Be sure to substitute “shareholder” for “partner” and “Sub Chapter S Corporation” for “Partnership.” While using these steps is helpful, the IRS will be quick to point out that Rev. Proc. 84-35 doesn’t apply to S corps.

In addition to these factors, your client must demonstrate reasonable cause for consideration of abatement of the penalties. Rev Proc 84-35 states that if “reasonable cause” can be shown, then they may abate the penalty. Good luck here because the IRS will look at the taxpayer’s history and if this is the first late filing or an anomaly, they may grant relief once—-but only once and they will say so. Hopefully your client will learn from the experience and at least get the 7004 extension filed by March 15 in the future…

by Tom O’Saben, EA