1. How the Form 1065 Penalty Works after September 15
IRC § 6698 applies when a required Form 1065 is late or omits required information, unless reasonable cause applies. For the 2025 calendar-year return due in 2026, the base penalty is $255 per partner for each month or part of a month the failure continues, up to 12 months.
A Partial Month Counts As a Full Month
The IRS counts every person who was a partner at any time during the tax year. A person who left before year-end can therefore still affect the calculation.
| Example | Calculation | Potential Penalty |
|---|---|---|
| 2 partners, one partial month late | $255 × 2 × 1 | $510 |
| 6 partners, one partial month late | $255 × 6 × 1 | $1,530 |
| 6 partners, two months late | $255 × 6 × 2 | $3,060 |
2 partners, one partial month late
- Calculation$255 × 2 × 1
- Potential Penalty$510
6 partners, one partial month late
- Calculation$255 × 6 × 1
- Potential Penalty$1,530
6 partners, two months late
- Calculation$255 × 6 × 2
- Potential Penalty$3,060
Once a completed return is ready, further delay can add another partial month. Broader filing controls may also warrant a review of income tax compliance.
September 15 Is an Extended Deadline
A calendar-year partnership normally files by the 15th day of the third month after year-end. Because March 15, 2026, fell on a Sunday, the 2025 return was timely through March 16. A timely Form 7004 generally extended filing to September 15.
- Confirm the partnership's tax year.
- Verify that Form 7004 was timely filed.
- Keep acceptance or timely-mailing records.
- Confirm the IRS filing date for Form 1065.
Fiscal-year partnerships can have different dates, so the penalty period must follow the deadline that actually applied.
An Incomplete Return Can Also Trigger Section 6698
A timely Form 1065 can still create a penalty issue if it fails to show information required under IRC § 6031. Before filing, check required schedules and statements and keep records explaining any unavailable information.
- Complete required return entries.
- Check required schedules and statements.
- Document missing information.
- Correct omissions promptly.
2. Which Partnership Penalty Relief Rules May Apply
Relief depends on the partnership's filing history and ownership structure. For a 2025 return filed in 2026, the main paths are AEP, Rev. Proc. 84-35, and reasonable cause. Each uses a different test.
AEP Can Apply Automatically
The IRS introduced the Automatic Exemption from Penalty, or AEP, in 2026. Form 1065 is eligible, and IRC § 6698(a)(1) is covered beginning with eligible 2025 tax-year returns.
- The same return type generally must have been timely filed for the prior three years.
- Any required tax must satisfy the IRS payment-history rules.
- Other business-return conditions may apply.
- AEP is applied when the eligible original return finishes processing.
No separate request is required when IRS records show eligibility. If a penalty is assessed despite apparent eligibility, the partnership can ask the IRS to review the account. The IRS currently lists § 6698(a)(1), rather than the incomplete-return provision in § 6698(a)(2), among the penalties eligible for AEP. See also tax law and administration.
Rev. Proc. 84-35 Has Several Conditions
Current IRS guidance continues to recognize a reasonable-cause presumption for certain small partnerships under Rev. Proc. 84-35. Having 10 or fewer partners is not enough by itself.
- No more than 10 partners for the tax year.
- Each partner is a qualifying natural person or estate.
- Each partner's proportional share is the same across partnership items.
- All partners timely reported their distributive shares.
Current IRS notice guidance also retains a condition concerning the former consolidated audit procedures. Every listed requirement should therefore be checked before relying on Rev. Proc. 84-35.
Reasonable Cause Depends on the Facts
IRC § 6698 also allows relief when the failure is due to reasonable cause. IRS guidance asks whether the filer used ordinary business care and prudence but could not comply because of circumstances beyond its control.
- Explain what happened and when.
- Connect the event to the filing failure.
- Describe the steps taken to comply.
- Keep supporting records.
Serious illness, disasters, unavailable records, or other documented events can matter. A routine mistake alone is generally a weaker basis.
3. How to Review a CP162A Partnership Penalty Notice
A CP162A notice can involve a late partnership return, an electronic-filing issue, or both. Start with what the IRS says went wrong. A wrong filing date or partner count needs different proof from a reasonable-cause request.
Check the Assessment before Requesting Abatement
Compare the notice with the partnership's filing record before drafting an explanation.
| Issue | Record | Response Focus |
|---|---|---|
| Extension not credited | Form 7004 proof | Show the extended deadline |
| Partner count is wrong | Ownership records | Correct the calculation |
| AEP may apply | Prior compliance history | Request eligibility review |
| Reasonable cause claimed | Timeline and records | Explain the failure |
Extension not credited
- RecordForm 7004 proof
- Response FocusShow the extended deadline
Partner count is wrong
- RecordOwnership records
- Response FocusCorrect the calculation
AEP may apply
- RecordPrior compliance history
- Response FocusRequest eligibility review
Reasonable cause claimed
- RecordTimeline and records
- Response FocusExplain the failure
If the issue remains unresolved, the same records may become relevant in a broader tax dispute.
Follow the Procedure on the Notice
IRS guidance allows a partnership to submit filing proof when it believes the penalty is wrong. If the penalty was correctly assessed but reasonable cause exists, the partnership may submit a written abatement request.
- Follow the deadline stated on the notice.
- Use documents for filing-date or extension disputes.
- Address AEP separately from reasonable cause.
- Keep a complete copy of the response.
If the IRS denies relief, the next step depends on the notice and procedural posture. A contested assessment may require a tax controversy and litigation review.
4. Frequently Asked Questions
Does a midyear change in partners affect the penalty?
It can. Section 6698 uses the total number of persons who were partners during any part of the tax year.
Can an on-time but incomplete Form 1065 trigger the penalty?
Yes. Section 6698 also covers a return that fails to show required information, subject to reasonable cause.
Can a multi-member LLC face the same penalty?
Yes, if it is classified as a partnership for federal tax purposes and must file Form 1065.
Does Rev. Proc. 84-35 apply if a partner is another business entity?
Generally, the IRS-listed partner-type condition is not met because each partner must be a qualifying natural person or estate.
5. Review a Partnership Late Filing Penalty with SJKP
A Form 1065 penalty often turns on the extension, filing date, partner history, prior compliance record, and evidence explaining the delay. SJKP's attorneys can review those records, identify the federal rule behind the assessment, and prepare an appropriate response to the IRS notice or penalty-relief decision.
21 Sep, 2026
