What CP162A means
CP162A says the IRS charged a penalty because either your partnership or S corporation return was late, or you did not file the return electronically as required. The IRM lists CP162A in the CP162 series as Failure to File Form 1065, 1066 or 1120S. For this penalty, the IRS treats a Real Estate Mortgage Investment Conduit as a partnership, and its Form 1066 as a partnership return.
The penalty is on the entity. It applies even if the entity owes no tax, because partnerships and S corporations generally pass income through to their owners.
Why the penalty exists
Partners and shareholders cannot file accurate returns without the Schedules K-1 that come from the entity return. Congress made a late entity return expensive to keep that chain moving.
IRC 6698 applies to partnerships required to file a return under IRC 6031. IRC 6699 applies to S corporations required to file under IRC 6037. Each imposes a penalty for each month or fraction of a month the failure continues, up to 12 months, unless the failure is due to reasonable cause. The monthly amount is a per-person figure multiplied by the number of people who were partners or shareholders at any time during the year. The statute's base figure is $195 per person per month, and IRC 6698(e) and 6699(e) adjust it for inflation for returns required to be filed after 2014, so use the figure on your notice.
Twelve months times every owner on the K-1 list. A small entity can run up a big number without owing a dollar of income tax.
A quick example of the math
Take a partnership with four partners that files its return five months late. The penalty is the inflation-adjusted per-person amount, times four partners, times five months. Using only the statute's $195 base to illustrate, that is $195 times 4 times 5, or $3,900, and the actual adjusted figure is higher. Double the partners or the months and the number doubles too.
One more feature of these penalties: IRC 6698(d) and 6699(d) say the deficiency procedures do not apply. There is no notice of deficiency and no prepayment Tax Court petition for this penalty. Relief comes through abatement requests, or through a refund claim after payment.
If you agree with the penalty
The IRS says to mail full payment by the date on the notice to avoid more interest. If you cannot pay in full, ask about a payment arrangement.
If the IRS got it wrong
The IRS lists situations where an authorized officer or partner can call 800-829-0922 to discuss the account:
- E-file penalty when not required. If the IRS charged a penalty for not filing electronically, and the partnership had fewer than the number of partners the IRS page specifies or had a waiver for that year, be ready to show the waiver or the number of partners.
- Late filing penalty when the return was on time. Be ready to fax proof of a timely extension, timely mailing, or similar documents.
Reasonable cause
If the penalty was correct but the entity had reasonable cause, the IRS says to mail a written explanation requesting abatement to the IRS office where the return was filed. The IRS will notify the entity if it accepts the explanation. Reasonable cause is a facts and circumstances question: serious illness, a disaster, records destroyed, or similar events, along with proof you acted promptly once the problem passed.
Rev. Proc. 84-35: the small partnership rule
For partnerships with 10 or fewer partners, the IRS page explains a presumption. Reasonable cause for a late or incomplete partnership return is presumed if the partnership can show all of these:
- No more than 10 partners for the year, counting a married couple filing jointly as one partner.
- Each partner was a natural person (other than a nonresident alien) or the estate of a natural person.
- Each partner's share of every partnership item was the same as that partner's share of every other item.
- The partnership did not elect to be subject to the consolidated audit rules in IRC 6221 through 6234.
- All partners reported their distributive shares on timely filed returns.
If all are met, return the notice with a statement signed under penalty of perjury that the partnership qualifies under Rev. Proc. 84-35. The IRS warns that the penalty can be reasserted if the statement turns out to be false in any material respect, and that a false statement penalty under IRC 7206 may apply.
First Time Abate
IRM 20.1.1.3.3.2.1 lists the failure to file penalties under IRC 6698(a)(1) and IRC 6699(a)(1) among those eligible for First Time Abate. The criteria include having filed the same return for the 3 preceding years, when required, with no unreversed penalties. If the entity has a clean history, ask for it.
Who can call
For a corporation, the IRS says any officer authorized to bind it by signature, or anyone the chief officer authorizes on Form 2848, can call. For a partnership, the IRS page refers to the tax matters partner. Partnerships under the current centralized audit rules designate a partnership representative under IRC 6223 instead. When in doubt, have a partner with authority call, or authorize a representative on Form 2848.
What not to do
Do not assume the penalty is wrong because no tax was due. The penalty is for the late return, not unpaid tax.
Do not leave out required information to file faster. The IRS says if the instructions list information as required, you must include it, and an incomplete return can be penalized too.
Do not sign a Rev. Proc. 84-35 statement unless every condition is true.
The law behind CP162A
IRC 6698 and IRC 6699 impose the monthly penalties for late or incomplete partnership and S corporation returns, with reasonable cause exceptions. Rev. Proc. 84-35 presumes reasonable cause for qualifying small partnerships. IRM 20.1.1.3.3.2.1 makes these penalties eligible for First Time Abate. IRM 21.3.1 describes the CP162 series.
If you need help with a CP162A abatement request, call us at (813) 229-7100.