Partnership Penalties

Today TaxMama® hears from Lara in the TaxQuips Forum who is helping get a partnership out of trouble. As it happens, this seems to be the week for questions from tax pros about the penalties IRS imposes on late-filed partnership tax returns. So let’s talk about those.  

 

 Well My Friends,

Believe it or not, the IRS tries to help make it easier for us to file our tax returns. And there has always been a problem with partnership returns. When the Form 1065, with extensions, was due on October 15^th, the same time as the individual tax return, the K-1s (report of pass-through information to the individual’s tax return) were issued too late. They were issued the same day as the individual tax return was due.

So a couple of years ago, the IRS finally woke up and decided to make the filing deadline a month earlier – September 15^th. (And that deadline is rapidly approaching!)

The IRS expects the partnership to issue K-1s (or at least a reasonable estimate of activity) by April 15^th.  The penalty for issuing K-1s late is $100 per K-1. (Not the end of the world.) The penalties are much higher if you don’t issue the K-1 intentionally. (We aren’t going there.)

However, the penalty for filing the partnership return (Form 1065) late is stiff. It’s $195 per partner, per month for up to 12 months. Even with only two partners, this is nearly $5,000.

So, the big question that has been coming up this week is, “How can we get the IRS to waive the penalties?”

Generally, the IRS will waive the penalties the first time the partnership files late. When all the first few years are filed late, since it’s all part of the one instance, you can usually persuade the IRS to let it go. How? IRS actually explains: 

If the partnership receives a notice about a penalty after it files the return, the partnership may send the IRS an explanation and the Service will determine if the explanation meets reasonable-cause criteria.

You can find acceptable reasons in the IRS’s Internal Revenue Manual. Normally, I would give you a link to the information. But the IRS just launched their new website today – and none of the links from the search engines (or even internally) are working. In about a week, Google this  “IRM, partnership penalties”

And remember, you can find answers to all kinds of questions about penalties and other tax issues, free. Where? Where else? At www.TaxMama.com.

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