Discussion:Abatement - Late Filing S Corp

In preparing the 2010 return, I was shocked to notice we may not have efiled the 2009 return. A call to the IRS determined that was in fact the case.

I immediately filed the return when I discovered the error, and received a late filing penalty notice from the IRS a month later ($89 per shareholder (4) x 11 months). This was the first notice we received that the return was late.

I've mistakenly missed filing an extension in the past, and they abated the penalty based on the letter I sent in response, and I assume a letter stating these facts will have the same result, but I'm wondering if I shouldn't be so confident.

• First, some practitioners on this board have reported that they have had success in arguing that relief should be granted under Rev. Proc. 84-35, 1984-1 C.B. 509. However, this Rev. Proc. applies only to partnerships, not S corporations. Nevertheless, if your client satisfies the requirements of this Rev. Proc., making the argument is worth a shot.
• Second, if the S corporation wasn’t required to file a return before 2009, or if no prior penalties have been assessed against the S corporation for the previous 3 years, then you might try asking the IRS to grant an administrative waiver called “First Time Abate.” See section 20.1.1.3.6.1 of the Internal Revenue Manual.

Then again, the majority of the time the penalty I'm dealing with is much smaller, usually on one or two shareholders. That may play more of a part in my success.

We've used the same basic premise with late penalties for 941's when a new S-Corp client hasn't done their quarterly payroll reports for the whole year. Of course the abatement only works for the first quarter, but again it's better than nothing.

I'll save my full rant mode for IRS rejection of the request, but if the kinder, gentler IRS can't see this was a simple mistake {K-1s sent/individual returns filed/state return filed with full federal copy} that doesn't warrant a $4K penalty than this is Exhibit Q of why there are pockets of genuine disdain for the IRS.

NIGHTSNORKELER - I would very much be interested in seeing the letter you send. Thanks.

Do you have them file a claim against your E&O insurance?

I recommend using the words "First Time Abate" and citing the IRM section in your correspondence. The one time I used it, I cited the IRM section and the IRS conceded the penalty after obtaining account transcripts for the previous 3 years' returns.

The nice thing about the Sec. 6699 penalty for late-filed S corporation returns is that the penalty didn't apply to returns filed for 2007 or earlier years. So, if the 2008 return was timely-filed, then you can probably get relief.

This one was for a newly formed S-Corp client:

I received the attached notice of penalty for failure to file my S-Corporation tax return due to the late filing of the return. I ask that you please consider abating this penalty. This was the first tax return for this newly formed corporation; previously activity for this business was reported on Schedule C of my personal tax return. When I contacted my personal CPA in April 2010 to file an extension for my personal tax return I mistakenly assumed that the extension would also apply to my business activity as in the past. I am now fully aware of the filing requirements and will make sure that my corporate tax returns in the future are timely filed or proper requests for extension are filed. For these reasons I kindly ask that you abate this penalty. Thank you for your attention to this matter.

This one was for a guy that just didn't hire a new accountant in time:

I received the attached notice of penalty for failure to file my S-Corporation tax return due to the late filing of the return. I ask that you please consider abating this penalty. The corporation had filed all previous tax returns timely. In 2009 I disengaged from my previous accountant and was unable to obtain the services of another accountant until after the extended filing date had passed. I have since retained the services of an accountant who has helped me get current on all of my tax filings. Due to the previous history of filing on time and the reasons stated above, I kindly ask that you abate this penalty. Thank you for your attention to this matter.

And here's one for a guy who put everything on hold while he was losing everything, including his home, business, and mother:

I received the attached notice of penalty for failure to file my S-Corporation tax return due to the late filing of the return. I ask that you please consider abating this penalty. This was the final tax return for this corporation, and the corporation had filed all previous tax returns timely. During the years 2008 and 2009, I was going through many personal hardships including bankruptcy and the loss of my mother. After working through these hardships I retained my former CPA to complete the final corporate tax return for xxxxxxx, Ltd. Due to the previous history of filing on time, the fact that this return is a final return with no activity other than the closing of the books, and the personal hardships that I, the sole shareholder and officer, was going through, I kindly ask that you abate this penalty. Thank you for your attention to this matter.

Anyway, you get the basic premise of it. And yes, these were all successfully abated.

"We received the notice for late filing of our scorporation, ABC. We ask you to consider doing a first time abatement of this penalty.

Without talking to a lawyer, or our tax preparer, because we like to do things ourselves, it's cheaper that way, we decided we wanted to close our scorp and divide the two condos. One condo goes to the 80% shareholder couple, and one condo to the 20% shareholder. Our company stock is $100. We have no idea on the breakdown of our Loans to Shareholders. We didn't document it well and we don't have a corporate minutes book, nor do we know anything about resolutions for anything. We don't have fair market value of the condos, don't have the money to pay for it, but we told the tax preparer that they should be 'about $150,000 each', but she won't take our word for it. She told us to see an attorney for a resolution for dissolution, to document the shareholder loans, and to start a corporate minutes book. So we decide not to close the corporation. Then after we talked to our lawyer (who didn't give the tax preparer any resolutions) we told her we wanted to close the corporation. Then when she started asking us for receipts or paperwork to prove that we put this and that into the corporation, we told her not to close the corporation. You see, the Loans from Shareholders for the 80% shareholder couple is all wrong, but she won't take our word for it. Then we decided to go elsewhere, picked up our stuff on August 30th and stiffed her. Oh, the 80% shareholder couple also own XYZ corporation which is also one month late, so please abate that. Otherwise, bill the tax preparer, we think it's her fault that both corps are late, even though she's never done the XYZ corporation."

You think this would get abated? True story, by the way.

Everyone, thanks for your assistance. JR has me a little concerned, but based on all the other comments and references, I'm confident we can get this penalty abated. Thanks.

I wonder how the IRS would react to a request like mine. You think the revenue agent would laugh so hard and be so thankful that I made his day, that he would approve the abatement?

The court ruled that the S corporation exercised ordinary care and prudence, despite not timely filing the return, because its president timely mailed the Schedules K-1 to the shareholders, and one of the shareholders filed a timely individual income tax return that reflected the information shown on the Schedule K-1.

In other words, the Tax Court applied Rev. Proc. 84-35, 1984-1 C.B. 509 (applicable to partnerships) to an S corporation.

This is a good, sound, logical, common sensical decision. Commentators have long held that the RP should apply to S-corps.

Bye Bye Bye to the penalties from NSync