Why the penalty adds up
A partnership that files Form 1065 late, or files it without required information, can face a penalty calculated per partner for each month the return is late, up to a cap on the number of months. Because it is based on the number of partners rather than on any tax owed, the penalty can be large even when the partnership itself owes nothing. Separate penalties can apply to late or missing Schedule K-1 forms furnished to partners, and states such as New York have their own partnership filing requirements and charges. Multi-member LLCs taxed as partnerships fall under the same rules. The IRS often assesses the penalty automatically and sends a notice before anyone has looked at the reasons for the delay.
Grounds for asking for relief
Penalty relief is often available on one of a few grounds. First-time abatement may apply if the partnership has a clean recent compliance history, and it can usually be requested without a detailed explanation. Reasonable cause relief requires showing that the partnership exercised ordinary business care and prudence, for example where a serious illness, a disaster, or the loss of records prevented timely filing. Longstanding IRS guidance also offers relief to some small partnerships whose partners reported their shares of income on their own returns, though its conditions are narrow and many partnerships do not fit them. Reliance on a preparer who simply missed the deadline is usually not enough by itself.
How we approach the notice
We start with the notice itself, the response date it gives, and whether the return has actually been filed, since relief usually requires a complete return. We collect the partnership's filing history, the dates and reasons for the delay, and any records of communication with the preparer. Depending on the facts, a request can be made by phone, by letter, or on Form 843, and a denial can often be taken to the IRS Independent Office of Appeals. If the penalty has already been paid, a refund claim may still be possible within the time the law allows. We also check whether the same issue affected partner returns or state filings so that every notice is handled together.
