Partnership returns: late filing penalties increase.

• Author: Snow, Danny R.

Late 2007 legislation brought changes to Sec. 6698, which provides for penalties against a partnership for filing a late or incomplete return. The civil penalty under Sec. 6698 applies when a partnership fails to file a complete Form 1065, U.S. Return of Partnership Income, by the due date of the return, including extensions. The penalty may be assessed on a timely filed return if the IRS determines that the return fails to show the information required under Sec. 6031 (related to gross income, deductions, and credits).

Under prior law, the penalty was calculated by multiplying $50 times the number of partners in the partnership during the year for each month, including fractional months, the return was late or incomplete. However, the coverage period was limited to five months. For example, if a partnership consisting of three partners for the entire year failed to file an extension request for the 2005 tax year and ultimately fried Form 1065 on October 15, 2006, the maximum penalty under Sec. 6698 would be $750 ($50 x 3 x 5) because the total number of months considered was limited to five.

Mortgage Forgiveness Debt Relief Act of 2007

The Mortgage Forgiveness Debt Relief Act of 2007, P.L. 110-142 (MRA), increased the per-partner penalty amount from $50 to $85. The coverage period was also increased from 5 months to a maximum of 12 months. Thus, ignoring the provisions of the Virginia Tech Victim's Relief Act discussed below, the new maximum penalty for a late filed Form 1065 using the same number of months and partners as in the above example would be $1,785 ($85 x 3 x 7). This is an increase of 238% over the above example resulting from both the increased penalty amount and two additional months of consideration. Expanding on this, if the return was filed beyond the new 12-month consideration period, the maximum penalty would be $3,060 ($85 x 3 x 12). This is a significant increase over the previous maximum penalty (for a three-partner partnership) of $750.

These two changes to Sec. 6698 under the MRA apply to returns required to be filed after December 20, 2007, the enactment date of the act.

The legislation also adds a penalty for late filed S corporation returns that is essentially equivalent to the increased partnership penalty (see below). Prior to the MRA, no statutory penalty existed for late filed S corporation returns.

Virginia Tech Victim's Relief Act

The Virginia Tech Victim's Relief Act, P.L. 110-141 (VTVR), increased the...