Small partnership returns - failure-to-file penalties.

• Author: Koppel, Michael D.
• Position: Partners & Partnerships

In Letter Ruling (SCA) 200135029, the IRS advised that it may change its administrative procedures to alleviate the impact of Sec. 6698, failure-to-file penalties on small partnership returns.

Under Sec. 6698, partnerships that fail to timely file a complete partnership return as required by Sec. 6031(a) are subject to a penalty. However, the Service does not assess a penalty if the taxpayer can show that the failure to file was due to reasonable cause. Reasonable cause is a condition under which an ordinarily intelligent person would act under similar circumstances.

Small partnerships (i.e., 10 or fewer partners) often do not file partnership returns; rather, each partner files a detailed statement of his share of partnership income and deductions with his own return. In such a situation, the legislative history to Sec. 6698 indicated that full reporting of partnership income and deductions by each partner was adequate and that it was reasonable not to file a partnership return.

Based on these facts and the legislative history, SCA 200135029 suggested that taxpayers answer the following six questions:

1. Is the partnership a domestic partnership?

2. Does the partnership have 10 or fewer partners (husband and wife and their estates are treated as one...