The CP162 hits business owners where it hurts. It's a penalty notice for filing a late partnership return (Form 1065) or S-Corporation return (Form 1120-S). The penalty is $235 per partner or shareholder per month, for up to 12 months. That math gets ugly fast.
A four-member LLC that files its partnership return three months late owes $2,820 in penalties. A 10-shareholder S-Corp that files six months late owes $14,100. These are penalty-only amounts. They have nothing to do with the tax owed. Even if the return shows zero tax due, the penalty still applies.
Why the Penalty Exists
Partnership and S-Corporation returns are information returns. They generate Schedule K-1s that each partner or shareholder needs to file their individual return. When the business return is late, every K-1 is late, and every individual return that depends on that K-1 is potentially delayed or filed incorrectly.
Congress made the penalty steep to incentivize timely filing. Whether you think that's fair or not, it's the law. But there are ways to get the penalty removed.
First-Time Abatement
If the business has been compliant for the past three years (all returns filed on time, all taxes paid, no penalties assessed), it qualifies for First-Time Abatement. FTA is an administrative waiver. You don't need to prove reasonable cause. You just need to ask and meet the compliance history requirement.
You can request FTA by calling the IRS at the number on the CP162 notice. One phone call, 15 minutes, and a $2,820 penalty disappears. Most small business owners never make that call because they don't know FTA exists.
Reasonable Cause
If FTA doesn't apply, you can request penalty abatement based on reasonable cause. The IRS considers circumstances beyond your control that prevented timely filing. Examples include natural disasters, serious illness of the person responsible for filing, death of a key person, fire or casualty that destroyed records, or reliance on a tax professional who failed to file on time.
"I forgot" is not reasonable cause. "My accountant had the information and didn't file" might be, if you can document that you provided everything to the accountant in a timely manner and reasonably relied on them to file.
The Rev. Proc. 84-35 Argument
For small partnerships, Revenue Procedure 84-35 provides that the IRS will consider reasonable cause to be established if the partnership can show that all partners timely reported their share of partnership income on their individual returns. This argument works when the late filing didn't actually cause any harm because everyone reported the income correctly anyway.
Not every IRS employee knows about Rev. Proc. 84-35. A well-drafted penalty abatement letter citing it specifically has a much higher success rate than a phone call asking for generic relief.
Don't Just Pay It
The CP162 penalty is one of the most commonly abated penalties in the tax code. Before you write a check, explore your options. FTA, reasonable cause, and Rev. Proc. 84-35 collectively cover most situations. A properly prepared abatement request costs far less than paying the full penalty.
If you've received a CP162, call us at (813) 229-7100. Penalty abatement is one of the things we do best.