Crafty New Penalties Imposed On Unwitting Business Owners

By David M. Kendrick, CPA, MST

Congress implemented a tricky revenue raiser under the Hiring Incentives to Restore Employment Act… of 2009; the Act increased the penalty for late filed Partnerships, LLCs, S-Corporations and Trusts to $195 per owner per month.  The sneaky part of the new penalty is that the filing deadlines for many of these “Pass-Through Entities” was shortened by a month to September 15^th for calendar year taxpayers.

In general, pass-through entities that fail to file by the September 15^th extended due date are subject to a late filing penalty. Late-filers are charged the $195 penalty for every owner (during any part of the tax year) for each month (or part of a month) that the return was late. Willful failure to file a tax return, supply information, or pay tax can result in even stiffer penalties.

Relief!

As with many IRS penalties, relief is generally available if you meet a “reasonable cause” exception.  In additional, there is automatic relief afforded certain qualifying partnerships.  Under Rev. Proc. 84-35, the following partnerships will qualify for an automatic waiver of the late-filing penalty for a partnership return for those that can answer yes to the following:

• The partnership has 10 or fewer partners (except nonresident aliens and estates)
• Each partner's share of every partnership item is the same as the other partner’s share of that item
• All partners have fully reported their share of partnership income, deductions and credits on their timely filed returns

Although relief is “automatic”, so is that computer generated IRS notice!  In order to get this “automatic relief” you must formally request that the penalty be abated. The automatic relief provision does not apply to late filed S-corporation, trust, or estate returns.  These taxpayers must rely on another reasonable cause exception.  A recent Tax Court case indicates it won’t be simple to get the IRS to back-off the penalties.  In Aileen Yat Muk Lam , TC Memo 2010-82, the court ruled that a taxpayer who relied on Turbo Tax to correctly report her income (but presumably failed to report it properly) will not qualify for relief!  The court pointed out that “reliance on the advice of a tax professional can establish reasonable cause and good faith for avoiding a penalty”.