Increased Late Filing Penalty: S-Corp, Partnership Returns

Think twice before you let your S-corporation or partnership tax return due date or extension of time to file lapse because the consequences have steepened. For tax years beginning in 2010, the late filing penalty amount for an S-Corporation or Partnership return has risen from $89 to $195. This penalty is calculated based on the total number of shareholders/partners during any part of the tax year multiplied by each month-or partial month-the return is late (up to 12 months). An example is provided below:

An S-corporation with a calendar-year end (Jan 1-Dec 31) is required to file the 1120S annual tax return on the 15th day of the third month following the close of the tax year—or March 15th of the following year. If the corporation has 3 shareholders, no extension of time to file was submitted and the return was filed on July 16th, the late filing penalty is calculated as follows:

Number of shareholders during the year = 3

Months late = 5 (March 16th – July 16th)
*if submitted on July 15th it’s only 4 months late

$195 penalty x (3 shareholders) x (5 months late) = $2,835
*or $567 per month

All penalties imposed by taxing agencies are non-deductible for income tax purposes, so you’re hit twice by the same penalty. Not only are you required to remit an unnecessary penalty, but you’re also denied the deduction of the penalty on that year’s tax return.

It’s important that documentation is gathered to support the date you submit your return, especially if you’re filing close to a deadline or after a deadline has passed. The taxing agencies may assess a late filing penalty from the date the return was received as opposed to the date it was mailed, which could be up to a 2 week differential.

We would recommend sending your return by registered or certified mail, which documents the official post-mark date and address where items were mailed. This certification will serve as sufficient evidence needed to abate a late filing penalty that is wrongfully imposed.

No penalty will be imposed if the corporation shows that the late filing was due to “reasonable cause”, but what constitutes reasonable cause?  This term can be interpreted in many different ways by taxpayers and by the IRS and deserves a blog of its own. It is up to the IRS to determine if your cause is reasonable, so it’s in your best interest to timely file all tax returns.

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