Partnership receives late file Penalty of $780 – request for penalty abatement

[TAXNJ]

CP162 Notice filed partnership return late – penalty under code sect 6698(a)(1)

PENALTY AMOUNT = $780 !!!!!!!


• Partnership (only two partners) calendar year
• Filed extension (5 month)
• Filed return 1 month late October 17, 2016
• Partnership history shows prior year returns filed on time



Has anyone dealt with the IRS representatives in Accounts Management who has authority to grant an FTA or how would you handle a request for penalty abatement?

An article by B. Mourge, Esq. mentions in part that I.R.C. § 6698:
provides that these penalties will not apply if it is "shown that such failure is due to reasonable cause." In other words, after the partnership receives a shocking notice from the Internal Revenue Service for trying to rectify past mistakes, the partnership may make a case to eliminate these penalties. While "reasonable cause" is usually predicated on the facts and circumstances of the case, the Internal Revenue Service has a long-standing procedure whereby small partnerships will be granted relief from I.R.C. § 6698 penalties, without specific factual showings. Under Rev. Proc. 84-35, 1984-1 C.B. 509, if the partnership satisfies the following elements, reasonable cause will be established:
(1) a domestic partnership;
(2) composed of 10 or fewer partners;
(3) all partners are natural persons (other than nonresident aliens) or an estate of a deceased partner;
(4) each partner's share of partnership items is allocated in proportion to the partner's interest in the partnership;
(5) all partners timely filed their income tax returns; and
(6) all partners fully reported their share of income, deductions, and credits of the partnership.

In addition, Even if relief is unavailable under Rev. Proc. 84-35, partnerships may still qualify for relief from these penalties through First Time Abatement (Internal Revenue Manual 20.1.1.3.6.l (08-15-2014)) or by establishing other grounds for reasonable cause.


Referencing the IRS manual FTA is also addressed. In part: IRS manual
20.1.1.3.6.1 (08-05-2014)
First Time Abate (FTA)
2.RCA provides an option for penalty relief for the FTF (IRC 6651(a)(1), IRC 6698(a)(1), and IRC 6699(a)(1)); FTP (IRC 6651(a)(2) and IRC 6651(a)(3)); and/or FTD (IRC 6656) penalties if the following are true for the taxpayer:

1. Has not previously been required to file a return or has no prior penalties (except the estimated tax penalty, TC 17X) for the preceding 3 years on the same MFT (except MFT 30/31, and see the exception for MFTs 01 and 14 in paragraph (5)(f)), and

2. Has filed, or filed a valid extension for, all currently required returns and paid, or arranged to pay, any tax due

[Burke]

I was able to get a waiver of penalty on a partnership return under the same circumstances, as I was able to show no tax was due from the partnership, and that both partners claimed the correct amounts on their personal returns which were timely filed (including extensions), because I also did them as well. That was some years ago; penalties were much less, but you can always press the case if you know the partners all claimed the K-1 amounts on their returns. I handled all inquiries and responses by mail. It actually took only one letter; and they agreed to drop it.

[TAXNJ]

I was able to get a waiver of penalty on a partnership return under the same circumstances, as I was able to show no tax was due from the partnership, and that both partners claimed the correct amounts on their personal returns which were timely filed (including extensions), because I also did them as well. That was some years ago; penalties were much less, but you can always press the case if you know the partners all claimed the K-1 amounts on their returns. I handled all inquiries and responses by mail. It actually took only one letter; and they agreed to drop it.

Thank you for the reply. Yes will 1st contact IRS via telephone # in Notice. Though prepared the 1065 with the "can discuss" box checked it might be wise to get the POA.

Will try to resolve via telephone because IRS wants penalty $ in two,weeks.

Hearing more lately about this absurd penalty.

[Lion]

The funny wording is because the IRS said no extension had been filed, but the following is what I have used (it even worked once for an S-corporation!):

ABC, LLC, 06-1111111, filed Form 7004 Application for Automatic Extension of Time To File on 3 April 2016. Therefore, its Form 1065 was timely filed 15 September 2016.

Even if you did not record its Extension prior to the original due date, ABC qualifies for an exception to the penalty you charged under IRC Section 6698(a)(1), because all two (2) partners, XZ, 222-22-2222, and YZ, 333-33-3333, reported all their shares of income and deductions timely on their joint 2008 income tax return Form 1040. Therefore, the partnership meets the criteria specified in Rev. Proc. 84-35, which says in part: “A domestic partnership composed of 10 or fewer partners and coming within the exception 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 required 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.”

We trust that you will remove the penalty due to reasonable cause for small companies.

[TAXNJ]

Thanks for the comments and sharing your success with the challenge of a FTA.

In this case, even though the client filed a month late, the client stiill satisfied the elements of
Rev. Proc. 84-35, 1984-1 C.B. 509.

[TAXNJ]

BURKE & LION - Success

Tried calling the number on the notice letter (message said too busy try later), so was able to get through to the Tax Practitioner Hotline in less than 2 minutes.

The IRS Representative said since it is a TEFRA Partnership, therefore Rev. Proc. 84-35, 1984-1 C.B. 509 does not apply.

However, the Representative said she will abate the penalty as a FTA and will send the client a letter within 10 days stating such.

So, no argument with me as to how the IRS Representative applied the penalty abatement of $750 as long as it was abated!

Also did not need a P.O.A. since the IRS Representative waited 5 minutes for my client to arrive to my office. The IRS Representative asked my client if they would give verbal permission for the IRS Representative talk to me!

I think I found one of the more pleasant IRS Representatives

I think this is where the IRS Representative found it to be TEFRA (from IRS Partnership - Audit Technique Guide - Chapter 13 - TEFRA (Revised 10-2007) and the requisite - LLC filing Form 1065:

A partnership containing fewer than 11 partners, commonly referred to as a small partnership, will qualify as a TEFRA partnership if it meets any of the following requisites:
It has as a partner any one of the following:
• Partnership.
• Limited liability Company (LLC) which files a Form 1065 or is treated as a disregarded entity (see Revenue Ruling 2004-88) for federal tax purposes.
• Trust (any type, including Grantor Trusts and grantor type trusts, even if the Schedule K-1 contains the SSN of the grantor).
• Nominee.
• Nonresident alien individual.
• S corporation.