The penalty for failure to file a partnership return will not be imposed if the partnership can show reasonable cause for failure to file a complete or timely return. Smaller partnerships (those with ten or fewer partners and who meet the other qualifications listed below) will not be subject to the penalty under this reasonable cause test so long as the partnership meets all of the following requirements:
- It is a domestic partnership.
- It has ten or fewer partners, each of whom is an individual.
- Each partner’s share of each partnership item is the same as his or her share of every other partnership item.
- The partnership or any of the partners shows, if IRS requests, that all
- partners have fully reported their shares of the income, deductions,
- and credits of the partnership on their timely filed income tax return.
Partnerships that don’t meet each of the above four requirements may still show reasonable cause for failure to file a timely partnership return by other means.
For purposes of the above requirements:
- Spouses are treated as one partner.
- A partnership item is any item required to be taken into account for income tax purposes, to the extent IRS regulations provide that the item is more appropriately determined at the partnership level than at the partner level.
- In determining whether a partner has fully reported his or her share of the income, deductions, and credits of the partnership, all the relevant facts and circumstances are taken into account, and the nature and materiality of any error or omission is considered.
The relief provided under Rev Proc 84-35 is often useful where the partners aren’t aware of the partnership return filing requirement or aren’t even aware that they have a partnership for tax purposes. Rev Proc 84-35 continues to apply to tax years beginning on or after January 1, 2018, even after the repeal of the definition of “small partnership” in pre-2018 IRC Section 6231(a)(1)(B). However, Rev Proc 84-35 allows the IRS to implement procedures requiring partnerships claiming relief under it to demonstrate that they are entitled to such relief.
While Rev Proc 84-35 creates a presumption that certain small partnerships that meet the criteria of Rev Proc 84-35 also meet the reasonable cause standard, it’s up to the taxpayer to claim that he or she falls within the requirements. The IRS may sometimes assert the failure-to-file penalty against a small partnership before it is clear whether the criteria are met.
If you need assistance seeking abatement of a late filing penalty or any other federal or state income tax matter, please contact Jeff Senney at 937.223.1130 or Jsenney@pselaw.com.