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Dear Tax Talk,
What is up with the IRS and partnership penalties? They used to be a few hundred dollars and now they’re thousands. We missed filing a 2007 return and filed it together with our 2008 return. We’re two partners in a small partnership and are getting hit with around $2,000 in penalties. What can we do?
As a way of increasing tax revenues to pay for small tax measures, Congress has been bumping up the late filing penalties for businesses. For 2006 returns, that late penalty for a partnership return was $50 per partner per month up to a maximum of five months. For two partners this meant that the penalty would be $500, not great but it didn’t break the bank.
For 2007 returns, the penalty was increased to $85 per partner for up to 12 months. The maximum penalty went up 400 percent that year, to $2,040.
For 2008, it became $90, for 2009 returns it becomes $89 and in 2010 it goes up to a mind-boggling $195 (why not round it off to $200?). S corporations, which previously had no penalty, are also being charged late fees per shareholder per month.
If a partnership has reasonable cause, the penalty can be waived. Reasonable cause means something big went wrong like a hurricane, death or sickness of a partner and similar catastrophes. “I forgot” won’t cut it.
Even if there is no reasonable cause, small partnerships have major relief in a 25-year-old revenue procedure. Revenue procedure 84-35 will grant automatic penalty waiver if the following conditions are met:
- The partnership has 10 or fewer partners, all of whom are natural persons (other than nonresident aliens) or estates.
- Each partner’s share of each partnership item is the same as such partner’s share of every other item.
- The partnership can establish, if requested by the IRS, that all partners have fully reported their shares of income, deductions and credits on their timely filed returns.
Accordingly, if you meet the foregoing criteria, you should write the IRS claiming relief under the revenue procedure.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
Read more Tax Talk columns. To ask a question on Tax Talk, go to the “Ask the Experts” page, and select “Taxes” as the topic.