Penalty Abatement for Small Partnerships

There are a lot of compelling reasons to offer tax resolution services, but tax resolution can also get complicated, and that scares away a lot of tax professionals. Luckily, not all tax resolution is as complicated as a doubt as to liability Offer in Compromise or Trust Fund Recovery Penalty case. Penalty abatement cases are often very straightforward and still extremely valuable to clients.

We’ve talked quite a bit about individual penalty abatement in the past, so we thought we’d come at it from a slightly different angle in this blog post: how to abate the penalty for failing to file Form 1065, U.S. Return of Partnership Income.

The Penalty

A late filing penalty is assessed against the partnership if the partnership fails to file Form 1065, U.S. Return of Partnership Income, by the due date, including extension (IRC §6698). The penalty can also be assessed if the return is filed without all the necessary information (unless there is reasonable cause).

If the return is both incomplete and late, only one penalty will be assessed. The incomplete return penalty will be assessed unless the return is more than 12 months late.

According to the IRS, “The penalty for each month is calculated by multiplying the applicable base penalty rate by the number of persons who were a partner in the partnership at any time during the taxable year.”

For example, under the $210 penalty, a 10-member partnership would be penalized $2,100 if their return was one month late and $25,200 if it was 12 months late. 

The Penalty Abatement

One avenue to penalty relief is outlined in Rev. Proc. 84-35. In order to qualify for penalty relief through this method, the partnership has to meet a few requirements:

• • The partnership must consist of 10 or fewer partners. A husband and wife filing a joint return is considered one partner.
  • The partnership must consist entirely of US resident individuals or the estate of a deceased partner.
  • Each partner has filed their individual tax return on time and reported their distributive share of partnership items.
  • Each partner’s items of income, deductions, and credits are allocated in the same proportion as all other items of income, deductions, and credits.
  • The partnership has not elected to be subject to the consolidated audit procedures under IRC § 6221 through IRC § 6233.

If these conditions are met, then the IRS will presume reasonable cause, permitted by IRC § 6698(a) when filing a request for penalty abatement. In other words, the requested abatement will be granted without question as long as all the requirements are met. Abatements for partnerships that fall outside the above requirements may still be considered, but reasonable cause won’t be assumed and must be proven by the practitioner.

Keep in mind, request for penalty abatement will automatically be denied if the partnership has elected to be subject to the consolidated audit procedures. The penalty can also be reassessed if the IRS finds that any partner was not a qualifying partner, any partner filed late, and if any partner failed to report their share of partnership income on their tax return (Rev. Proc. 84-35).

LLCs taxed as partnerships may also qualify for penalty abatement.

If Rev. Proc. 84-35 relief was denied or the partnership is ineligible, you may want to consider abatement for reasonable cause, as permitted by IRC § 6698(a), or first-time penalty abatement (FTA).

Want to learn more about penalty abatement? We’ve got a free ebook you’ll love: Penalty Abatement Basics and Techniques.

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