Partnership Returns: Late Filing Penalties Increase

By Danny Snow, CPA, Thompson Dunavant PLC, Memphis, TN

Editor: John L. Miller, CPA

Late 2007 legislation brought changes to Sec. 6698, which provides for penalties against a partnership for filing a late or incomplete return. The civil penalty under Sec. 6698 applies when a partnership fails to file a complete Form 1065, U.S. Return of Partnership Income, by the due date of the return, including extensions. The penalty may be assessed on a timely filed return if the IRS determines that the return fails to show the information required under Sec. 6031 (related to gross income, deductions, and credits).

Under prior law, the penalty was calculated by multiplying $50 times the number of partners in the partnership during the year for each month, including fractional months, the return was late or incomplete. However, the coverage period was limited to five months. For example, if a partnership consisting of three partners for the entire year failed to file an extension request for the 2005 tax year and ultimately filed Form 1065 on October 15, 2006, the maximum penalty under Sec. 6698 would be $750 ($50 × 3 × 5) because the total number of months considered was limited to five.

Mortgage Forgiveness Debt Relief Act of 2007

The Mortgage Forgiveness Debt Relief Act of 2007, P.L. 110-142 (MRA), increased the per-partner penalty amount from $50 to $85. The coverage period was also increased from 5 months to a maximum of 12 months. Thus, ignoring the provisions of the Virginia Tech Victim’s Relief Act discussed below, the new maximum penalty for a late filed Form 1065 using the same number of months and partners as in the above example would be $1,785 ($85 × × 7). This is an increase of 238% over the above example resulting from both the in-creased penalty amount and two additional months of consideration. Expanding on this, if the return was filed beyond the new 12-month consideration period, the maximum penalty would be $3,060 ($85 × 3  × 12). This is a significant increase over the previous maximum penalty (for a three-partner partnership) of $750.

These two changes to Sec. 6698 under the MRA apply to returns required to be filed after December 20, 2007, the enactment date of the act.

The legislation also adds a penalty for late filed S corporation returns that is essentially equivalent to the increased partnership penalty (see below). Prior to the MRA, no statutory penalty existed for late filed S corporation returns.

Virginia Tech Victim’s Relief Act

The Virginia Tech Victim’s Relief Act, P.L. 110-141 (VTVR), increased the dollar amount under Sec. 6698(b)(1) by $1. However, this increase is limited to returns filed for years beginning in 2008. Thus, for tax years beginning in 2008, the per-partner penalty for filing a late or incomplete partnership return will be $86 per partner for a maximum of 12 months. The provisions of the VTVR are effective for and limited to returns for tax years beginning in 2008.

Reasonable Cause Relief

If a partnership is able to show that the failure to timely file a complete return is due to “reasonable cause,” then the provisions of Sec. 6698 will not apply. The Internal Revenue Manual states that a “taxpayer may establish reasonable cause by providing facts and circumstances showing the taxpayer exercised ordinary business care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless was unable to comply with the law” (IRM Section

Section of the IRM provides guidance on what may constitute reasonable cause, which may include but is not limited to:

  • Death or serious illness of the taxpayer;
  • Fire, casualty, or natural disaster;
  • Inability to obtain necessary records;
  • Reliance on a competent tax ad-viser; and
  • Erroneous advice from the IRS.

Rev. Proc. 84-35

Rev. Proc. 84-35 provides a reasonable-cause safe harbor for certain small partnerships. Under this procedure, a domestic partnership composed of 10 or fewer partners, each of whom is a natural person (other than a nonresident alien) and each of whom has fully reported his or her share of the income, deductions, and credits of the partnership on timely filed income tax returns, is considered to have met the reasonable cause test and is not subject to the penalty under Sec. 6698.

If a partnership of 10 or fewer partners fails to qualify for relief under Rev. Proc. 84-35, the partnership may still show reasonable cause for failure to file a timely and complete return (Rev. Proc. 84-35, §3.03).

It should be noted that in 2005, the Treasury Inspector General for Tax Administration (TIGTA) called for stronger penalties for late filed or incomplete partnership returns. Among the recommendations was the repeal of Rev. Proc. 84-35. Citing congressional intent, the Service disagreed, so small partnerships may still avail themselves of the safe-harbor provisions of Rev. Proc. 84-35. However, many of the recommendations in the 2005 TIGTA report were, at least partially, addressed in the MRA.

S Corporations

The MRA added Sec. 6699, which imposes a monthly penalty for any failure to timely file a complete S corporation return. The provisions of Sec. 6699 mirror those of Sec. 6698 as to the amount ($85) per shareholder and coverage period (12 months). The new penalty is effective for returns required to be filed after December 20, 2007. However, the additional $1 per partner for 2008 partnership returns does not apply to the shareholders included on Form 1120S, U.S. Income Tax Return for an S Corporation.

Because Rev. Proc. 84-35 was issued prior to any statutory penalty for the late or incomplete filing of Form 1120S, practitioners must wait to see if the Service provides the same automatic relief to small S corporations.


While partnerships, and now S corporations, may still avoid penalties for the late or incomplete filing of returns by demonstrating reasonable cause, failure to do so may result in an increase in assessed penalties. Practitioners should take due care to ensure that extension requests are timely filed and should maintain evidence of their timely filing. Due to the increased penalty rate, practitioners should also advise their clients to maintain evidence of the timely filed (including extension) complete returns. 


John L. Miller, CPA, Faculty Instructor, Metropolitan Community College, Omaha, NE

Mr. Miller and Mr. Snow are membersof the AICPA Tax Division’s IRS Practice and Procedures Committee.

For further information about this column, contact Mr. Miller at

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