Late Filing Penalties for Partnerships and S-Corporations

We often see situations where a taxpayer has significantly underreported their business deductions and could realize a substantial refund of past taxes if the business return was filed. However, for a variety of reasons, the return may not have originally been filed so submitting it now will result in a late filing penalty. And these penalties can often amount to several thousand dollars each.

If the potential refund is large enough, it will still make sense to file the business return late. And the good news is that these penalties can often be waived upon request. So here’s a little background on the penalties.

Originally, the IRS did not impose penalties when a business filed its return late. In the 1980’s and 1990’s the tax review bodies raised concerns regarding the large number of late business returns and proposed penalties. However, the IRS tax commissioner at the time strongly objected to the proposed penalties. As a result, penalties were adopted, but with generous provisions for having them waived. The criteria to qualify for a penalty waiver are as follows (see IRC 6231(a)(1)(B)):

  1. The business is a US partnership entity with ten or fewer owners;
  2. Each owner is an individual or the estate of a deceased owner;
  3. Each owner receives an equal share of income, deductions and credits.
  4. The business has not elected to be subject to the consolidated audit procedures under IRC 6221 through IRC 6233; and
  5. Each owner reported filed their taxes on time and reflected any income realized from the business when they filed. Note that if the business shows a loss, this criterion is met.

So if it makes sense to file a late business return but you’re concerned about the potential late filing penalty, keep in mind that there’s a very good chance the penalty can be waived. The first penalty can generally be waived as a courtesy and subsequent penalties can be waived upon making written request.

By: Evan A. Nielsen, Esq. (Licensed in California)

If you want more information about waiving late filing penalties, contact your tax preparer or see the following:

  1. SCA 200135029.
  2. Revenue Procedure 84-35.
  3. Memo from TIGTA recommending stronger sanctions against late filed partnership returns AND the Commissioner’s disagreement with the TIGTA recommendation.
  4. IRS Penalty handbook, section (04-19-2011).