So, your partnership tax return is late. Here is what to know…
Filing a partnership tax return late can result in penalties from the IRS. Understanding these penalties is important to understand the impact so you can make a cost/benefit decision. Here’s a detailed look at the penalties associated with late filing of Form 1065, U.S. Return of Partnership Income.
Penalty Structure
The IRS imposes a penalty for late filing of a partnership tax return under Internal Revenue Code (IRC) Section 6698. The penalty is calculated based on the number of partners and the duration of the delay:
Late filing of the return: The IRS assesses a late filing penalty of $235 per partner, per month, up to 12 months that the return is late
Failure to furnish information timely: The IRS assess a failure to furnish information timely penalty of $310 per partner.
For example, if a partnership with 10 partners files its return three months late, the penalty would be calculated as follows: $10,150 [$235 x 10 partners x 3 months + $310 x 10 partners]
Note that the IRS will impose more severe penalties without limit if it appears the taxpayer’s conduct reflects intentional disregard.
Exceptions and Relief
There are circumstances under which the IRS may waive the penalty:
Reasonable Cause: If the partnership can demonstrate that the failure to file on time was due to reasonable cause and not willful neglect, the penalty may be waived. Reasonable cause is typically shown by proving that the partners exercised ordinary business care and prudence but were still unable to file the return by the due date.
Small Partnerships: Under Revenue Procedure 84-35, small partnerships (those with 10 or fewer partners) may qualify for penalty relief if all partners have timely filed their individual tax returns and reported their share of partnership income.
Other impacts of Late Filing
Late filing can have several negative consequences beyond the financial penalties:
Increased Scrutiny: Late filings may attract additional scrutiny from the IRS, potentially leading to audits.
Impact on Partners: Penalties and interest can affect the individual partners, especially in cases where the partnership agreement stipulates that partners are responsible for their share of penalties.
Partner tax returns: Late filing of a partnership tax return can turn into a chain reaction of late filings at the partner level. This is because the partners of said partnership are waiting on the K-1 statement from the completed partnership tax return. This K-1 statement includes the partners allocable share of items picked up from its interest in the partnership that are required to be reported on their own tax return.
Best Practices
To avoid late filing penalties, partnerships should consider the following best practices:
Professional Assistance: Engage a tax professional to assist with the preparation and filing of the partnership tax return.
Accurate Record-Keeping: Maintain accurate and up-to-date records to facilitate timely and accurate filing.
Timely Filing: Ensure that the partnership tax return is filed by the due date, including any extensions. It is highly recommended that the partnership considers its partners’ compliance timing needs and file the return as soon as possible. This is to provide adequate time for partners to consider the K-1 received for their own tax return by their due date.
Note that the due date for U.S. partnership tax return filings is 2.5 months after the company’s tax year ends. For example, a partnership with a calendar year ending December 31st, 2024 will have until March 15, 2024 to file their form 1065 partnership tax return with the option to file an extension for 6 months to extend the due date out to September 15, 2024.
By understanding and adhering to these guidelines, partnerships can avoid the costly penalties associated with late filing and ensure compliance with IRS requirements. Stay tuned for an upcoming article on U.S. partnership compliance where we will discuss the new law on amending partnership tax returns.
If you have any specific questions or need further assistance with partnership tax returns, feel free to reach out to us! Schedule a Free Consultation
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Email: chad.hagger@hagger-tax.com
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