Amended return on late return

[MarkCTX]

Individual client timely filed extension for 2012, however client exceeded the extended due date and filed late with an over-payment. No tax due, no penalty. Over payment was applied to following year. Now a new K-1 surfaces from a new venture entered into during 2012. The profit from this K-1 generates a balance due for 2012. If the client amends 2012 will there be a failure to file penalty since now there is tax due for that year and the return was filed late. Probably better to file amended return than have the IRS catch the omission. Anybody have any experience with this scenario?

Mark C.

[Roland Slugg]

First I would like to commend you ... and thank you ... for posing such an interesting and extremely perceptive question. To summarize: The O.R. was filed late (i.e. after the extended due date), but since there was no tax due, according to that O.R., there were no FTF or FTP penalties added at the time. However, a change in that return necessitated by a K-1 received late means that the O.R. would have shown a balance due if that K-1 income had been reported thereon.

I tried to find authoritative information about this scenario but could not, so I will tell you what I think: I believe the assessment of a FTF penalty is possible and would probably be legitimate. However, my guess is that the IRS will not assess a FTF penalty. It probably will, however, assess a FTP penalty on the additional tax payable with the amended return, plus interest, of course. That won't change even though the O.R. indicated a refund. Once that overpayment was applied to the following year's tax, it can't be undone, nor can it be used to reduce a FTP penalty arising from an amended return filed later.

If the IRS does bill the taxpayer for a FTF penalty, I would suggest a letter be sent requesting abatement and explaining that the O.R. would have been filed on time if the taxpayer had known at the time that there was actually a net balance due, and that it was only filed late because the taxpayer thought there was an overpayment for that tax year. It's actually a pretty lame argument, but the IRS might buy it ... especially if the proposed FTF penalty is small. By the way, the taxpayer might even get the IRS to waive the FTP penalty, based on "reasonable cause."

[MarkCTX]

Thanks for your comments. What I am getting is to file the 1040X with a new schedule E. Then include a 2210 for the interest "penalty" only. Whoever processes the return may acknowledge that the penalty was addressed and let it go at that. There are a lot of "maybes" and "probablies" in discussing this fact set with other preparers. I could find no authority on this scenario either. Thanks for your help!

Mark C.

[Roland Slugg]

You will have to file a new or amended Schedule E with F-1040X, of course, to report the additional p'ship income, but do not file F-2210. This is not a F-2210 situation. The IRS will bill the T/P for the interest on the late-paid tax along with the FTP penalty ... and it may not impose a FTP penalty at all.

I hope you will add a follow-up post to this same thread letting us know what penalty or penalties the IRS charged and, if applicable, if they were waived if your client requested an abatement.

[MarkCTX]

It may take a few months to see what the final outcome will but it is good information as this situation has to pop up every now and then. On the 2210, this has been suggested by other preparers as the IRS may think the penalty issue has been addressed totally and won't dig any deeper. After all this is a paper return. Can't count on it but may be worth a try. I'll try to keep the final result in the loop.

Mark C.