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Discussion:Is this my penalty...anything I can do?

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Discussion Forum Index --> Business Growth Community --> Is this my penalty...anything I can do?


LJACPA (talk|edits) said:

10 November 2008

First, I have to get up on my 'soapbox' for just a moment or so. I know no one ever said life is fair, but my gosh. I am so sick and tired of all of these 'under the table', cash dealing tax evaders and try to do everything possible to do things right for my clients and me. You talk about the small business owners getting hit from every direction, no matter how careful. The IRS will give you 'one pass', so to speak, sometimes, and then will hit you with every conceivable penalty and interest every time you make even the slightest mistake. What about all those people out there who never file a tax return, who never pay a penny of taxes and then those of us who try to do it all right and make an error and pay taxes, penalties, interests - I guess to make up for those who don't? It's just not right!

Okay, my issue. Taxpayer forms an LLC on November 7, 2007 using an attorney, no real activity other than some minor start-up costs for 2007 (I didn't get any info until 3/18/08). As of 03/14/08, I have no information for them at all for 2007. I call and she brings in a sheet of paper summarizing their individual info with a note at the end that they've incurred some LLC expenses, that's it. I have to ask for FID #, get that, prepare extensions for individual returns as they're going to be out of the country on 4/15/08. They return home, I've finished 1040 and state and the 1065 with no activity reported. They mail on 05/02/08. My first, biggest, STUPID mistake was filing a 1065. With no activity to report, I could simply have not filed anything for 2007 as this easily could have gone on Schedule Cs - for husband and wife (note: when I filed extensions, I do not believe I knew that this was MMLLC, assumed only wife) had there been any activity to report. So, now they get a notice for this LLC being filed late for $340! Two members, two months at $85 per. No activity, only existed for 1 1/2 months and they get hit HARD. I see two possible options. One, respond that the 1065 was filed in error and that they intended to elect to file Schedule Cs. Question, is it too late to make this election since I've already filed the 1065? Two, respond that there was no activity and return was filed simply to, what, that I'M STUPID???? Of all things to be penalized for and 340 dadgum dollars! I only charged them $100 to do this stupid return. What should I do? ...Thanks!

Me and the Boss (talk|edits) said:

10 November 2008
From a previous discussion "Do Sec 6698 penalties flow through ..." I responded:

I have had a pretty good success rate getting this penalty waived just by begging for mercy and including wording like this in my pathetic please-don't-beat-me-with-the-penalty-stick letter.

"As explained in the instructions to Form 1065, the penalty is not imposed on a partnership that is not subject to the Consolidated Audit Procedures of Sections 6221 through 6223, provided all partners have timely filed income tax returns reporting their shares of the income, deductions and credits of the partnership."

NOTE: You can't find those statements in the current instructions any more, but this still worked as recently as last year. Its worth a try. At least it was worth a try for me, because otherwise, I was probably going to have to man up and cover the penalty.

Kevinh5 (talk|edits) said:

10 November 2008
I just had a similar penalty waived by writing a letter too.

Roxnpa (talk|edits) said:

10 November 2008
If you get the right person at the IRS, you can probably get them to waive the penalty; gotta have reasonable cause which would be you're dealing with idgits who weren't forthcoming with information in a timely manner & weren't clear as to their actual business structure. Being newly formed and with no real expenses, I'd have gone the joint venture route, give them equal SCH C's & be done with it. Tell the IRS you plan on amending or better yet, have in hand & fax it to them. Call the practitioner priority line & beg. Be kind, whine & get them on your side-it is possible! Don't forget the POA, which can also be faxed (they'll hold while you send it).

Taxguy1024 (talk|edits) said:

10 November 2008
Wouldn't they qualify for an automatic waiver of the penalties under Rev. Proc. 84-35..??

Blrgcpa (talk|edits) said:

10 November 2008
H&W partnerships can now file 2 sched c instead of a 1065.

JAD (talk|edits) said:

10 November 2008
No penalty due. There's a rev proc or something. I will find it for you and post back.

I have received several ridiculous penalty assessments the last several months. It's as though the govt is out of $$ and therefore randomly assessing. None have stuck.

JAD (talk|edits) said:

10 November 2008
It's probably the RP that Taxguy cited...sorry Taxguy, I just noticed after scanning the page again.

Me and the Boss (talk|edits) said:

10 November 2008
Neither Tax Alamanac, nor the IRS.gov has Rev Procs going back to 1984. Is there another site where I can find this Rev Proc?

Goldy5 (talk|edits) said:

10 November 2008
Below is the text to Rev. Proc. 84-35

REV. PROC. 84-35, 1984-1 C.B. 509 SECTION 1. PURPOSE The purpose of this revenue Procedure is to update Rev. Proc. 81-11, 1981-1 C.B. 651, to conform to the small partnership provisions of section 6231(a)(1)(B) of the Internal Revenue Code. Rev. Proc. 81-11 sets forth the procedures under which partnerships with 10 or fewer partners will not be subject to the penalty imposed by section 6698 for failure to file a partnership return. SECTION 2. BACKGROUND .01 Section 6031(a) of the Code provides that every partnership must make a return for each taxable year including all information that the Secretary may by forms and regulations prescribe. .02 Section 402 of the Tax Equity and Fiscal Responsibility Act of 1982, 1982-2 C.B. 462, 585, added sections 6621 through 6232 to the Code to provide that the tax treatment of partnership items must be determined at the partnership level. For purposes of these sections, section 6231(a)(1)(A) defines “partnership” to mean any partnership required to file a return under section 6031(a) except as provided in section 6231(a)(1)(B). .03 Section 6231(a)(1)(B) of the Code provides an exception to the definition of “partnership” for small partnerships. In general, the term “partnership” does not include a partnership if the partnership has 10 or fewer partners, each of whom is a natural person (other than a nonresident alien) or an estate, and each partner's share of each partnership item is the same as such partner's share of every other item. A husband and wife, and their estates, are treated as one partner for this purpose. .04 Section 6698 of the Code imposes a penalty if any partnership required to file a return under section 6031 fails to file a timely return, or files a return that fails to show the information required by that section, unless the failure is due to reasonable cause. .05 The Conference Committee Report concerning section 6698 of the Code states: The penalty will not be imposed if the partnership can show reasonable cause for failure to file a complete or timely return. Smaller partnerships (those with 10 or fewer partners) will not be subject to the penalty under this reasonable cause test so long as each partner fully reports his share of the income, deductions, and credits of the partnership... H.R. Rep. No. 95-1800 (Conf. Report), 95th Cong., 2d Sess. 221 (1978), 1978-3 C.B. (Vol. 1) 521, 555. See also H.R. Rep. No. 95-1445, 95th Cong., 2d Sess. 75 (1978), 1978-3 C.B. (Vol. 1) 181, 249, and S. Rep. No. 95-1263, 95th Cong., 2d Sess. 106 (1978), 1978-3 C.B. (Vol. 1) 315, 403, which contain similar statements. SECTION 3. REQUIRED PROCEDURES .01 A domestic partnership composed of 10 or fewer partners and coming within the exceptions outlined in section 6231(a) (1)(B) of the Code will be considered to have met the reasonable cause test and will not be subject to the penalty imposed by section 6698 for the failure to file a complete or timely partnership return, provided that the partnership, or any of the partners, establishes, if so requested by the Internal Revenue Service, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns. .02 Partnerships having a trust or corporation as a partner, tier partnerships, and partnerships where each partner's interest in the capital and profits are not owned in the same proportion, or where all items of income, deductions, and credits are not allocated in proportion to the pro rata interests, do not come within the exception provisions of section 6231(a)(1)(B) of the Code and, are subject to the penalty imposed by section 6698. .03 Although a partnership of 10 or fewer partners may not be automatically excepted from the penalty imposed by section 6698 of the Code under section 3.01, the partnership may show other reasonable cause for failure to file a complete or timely partnership return. .04 In determining whether a partner has fully reported the partner's share of the income, deductions, and credits of the partnership, for purposes of section 3.01, all the relevant facts and circumstances will be taken into account. In making this determination, the nature and materiality of any error or omission will be considered. For example, although an isolated clerical error normally reflects no more than mere inadvertence, such an error may be of such magnitude that the partner will not be considered to have fully reported. If the error or omission results in a de minimis understatement of the net amount payable with respect to any income tax, the penalty will not be asserted. However, if the error or omission results in a material understatement of the net amount payable with respect to any income tax, the partner generally will not be considered to have fully reported and the penalty will be applied. SECTION 4. EFFECT ON OTHER Revenue Procedures Rev. Proc. 81-11 is modified and superseded. SECTION 5. EFFECTIVE DATE This revenue Procedure is effective for returns required to be filed after June 22, 1984.

Southparkcpa (talk|edits) said:

10 November 2008
This entire thread should stand as an example of the kind of terrific help available and people who are willing to help. LJA made a human error which we all make, explained his/her position well and got pretty darn good help.

LJACPA (talk|edits) said:

10 November 2008
Exactly! And, I got to whine in the process. Thank you again for the help and for the cites.

Joanmcq (talk|edits) said:

10 November 2008
I've gotten this sucessfully waived before. The penalty is for late filing the K-1s, not the 1065. BTW, you can't elect the H&W joint venture if an LLC is involved.

Seaside CPA (talk|edits) said:

11 November 2008
Joanmcq is correct. Since this is an LLC, cannot go the joint venture route and report on two schedule C's.

Darleneh (talk|edits) said:

11 November 2008
My client just faxed me over the late notice from the IRS for the same thing, over $1000!! It is ridiculous. My client told me they formed an LLC in 2007 (already have an S corp) but no activity because they want to do real estate rentals - really not the market for it right now. Anyway, I let it go and didn't file but then PA came looking for the corporate return in September. So my client finally made the decision that it was 50/50 with wife rather than just him, so I am looking at a 1065. So I filed a $0 return and filed the state. Come to think of it, I should have never filed the 1065, would have been a lot easier than having this to deal with.

My question is can I as the CPA with an attached POA sign the letter to the IRS rather than sending it to my client to sign and mail in?

Taxguy1024 (talk|edits) said:

11 November 2008
On a related topic, don't forget about the late filing penalties now for S corporations.......there's no automatic exception and the IRS has said that they aren't going to waive them without a valid reason.

Joanmcq (talk|edits) said:

12 November 2008
Yes, you can sign the request for abatement if you have a POA. Do it all the time.

MWPXYZ (talk|edits) said:

12 November 2008
I have had this penalty assessed several times over the past twenty years. Often a letter to the IRS seems to make the problem go away. But afer a couple years, another notice (for the same year) will pop up again.

Now I send the following letter:

The above captioned taxpayer is a small partnership deemed to meet the reasonable cause test under IRC 6231(a)(1)(B). The partnership is a domestic partnership consisting of ten or fewer partners, which equally share partnership items. The partners have filed timely tax returns.

Please note the attached documents that explain the tax code section that requires the abatement of a penalty in this case.

  1. SCA 200135029,
  2. Revenue Procedure 84-35,
  3. Portions of a Memo from TIGTA recommending stronger sanctions against late filed partnership returns AND the Commissioner’s disagreement with the TIGTA recommendation, and
  4. A portion of the Penalty handbook noting the penalty relief available to small partnerships

For the above named partnership, please abate all penalties.

                                   Sincerely yours,


Now I receive repsonses from the IRS that state the penalty has been abated. Previous conversations with the IRS personnel were not always constructive because the IRS representative did not "believe" the Code Section really applied (why have a penalty if another Code Section can abate it?) or they thought an "old" Rev Proc from 1984 no longer applied!

Emailangela (talk|edits) said:

21 January 2011
This thread was very helpful...except what else would constitute reasonable cause? Any suggestions? I am trying to get a late filing penalty removed but one of the partners is a corporation (just owns 1%) and that corporation did not file a return. The partnership had a loss so the corporation paid all the tax it owed, but did not file. Any suggestions?

Kevinh5 (talk|edits) said:

21 January 2011
when you used the yellow box to search, did you miss Discussion:Reasonable Cause - good excuses ?

Actionbsns (talk|edits) said:

24 January 2011
FWIW, on the late filed W-3 I noted above, the excuse worked all penalties were removed along with interest. Last year I had another client receive a similar late filing penalty for about three years prior, the assessment was $25,000!!!! I was really nervous about that one, it wasn't my fault, but the client has other ongoing issues with IRS and I wasn't sure they were going to be too easy to work with. They said they didn't have a W-3 and the client had just plain ignored them too long. He uses PayCycle for his payroll and files all forms online through them. They don't provide a copy of the W-3. So I wrote a letter explaining all of that and providing a copy of all W-2's and a W-3 that I prepared and pleaded for mercy, told them he had been a really good boy ever since filing all forms on time via the internet, and asked to have all penalties and interest abated. They did it. That client was one happy customer. He still uses PayCycle and still doesn't get a copy of the W-3, so when I review the package prior to distributing W-2's I complete an employer's copy for him and retain one for the file.

Tax Writer (talk|edits) said:

24 January 2011
Mike, I left a message on your profile-- if anyone can get me a copy of the memo from the IRS commissioner that Mike mentions in his penalty abatement form letter, I'd really appreciate it! It's the only document in the list I couldn't find online.

Tax Writer (talk|edits) said:

10 July 2011
Hello all-- I'm posting on this discussion because I am getting e-mails pretty frequently about this issue, (partnership penalty abatement). So here is the language and the document for the appropriate IRS response. I have the PDF hosted on my website so anyone can download it. Hope this helps. The language and the link are below:

Please note the attached documents that explain the tax code section that requires the abatement of a penalty in this case.

SCA 200135029,

Revenue Procedure 84-35,

Portions of a Memo from TIGTA recommending stronger sanctions against late filed partnership returns AND the Commissioner’s disagreement with the TIGTA recommendation, and A portion of the Penalty handbook noting the penalty relief available to small partnerships


For the above named partnership, please abate all penalties.

Link to DOC. [1]

Adamlibman (talk|edits) said:

22 November 2011
What IRS address did you mail this to?

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