S Corporation Late Filing Penalties and Abatement

What do you do when IRS sends you a large late filing penalty for your S corporation? Regarding your specific circumstances Professional tax CPA can manage your issue!

John, John’s wife Mary and John’s son Jack:

When we met, I explained that there is a penalty abatement for late filing of partnership returns.

Unfortunately there’s nothing like the partnership one to abate penalties from failure to file on time for S and C corporations.

The partnership provision allows a complete abatement. The S corporation late filing is much more serious.

Therefore, I recommend that you get Mark everything immediately to avoid another month of late filing.

John, I also recommend that we show only one shareholder (you and your wife) because the penalty is $195 per month per shareholder. If you have three shareholders on the two years of tax returns you are possibly looking at:

For 2011:
3-15-12 $585 times 26 months=$13,650

For 2012:
3-15-13 $585 times 14 months=$8,190

For 2013:
3-15-14 $585 times 2 months=$1,170

Total requested by IRS $23,010

If one shareholder, the penalty would be $7,670. The paid penalty is not tax deductible. Instead it creates a toxic cash available versus taxable income because cash generated from taxable income in the current year is paying penalties that are not tax deductible.

Once you get to the end of the year and we work on preparing tax reduction planning, you have taxable income of an additional $7670 without the cash to reduce the additional taxable income. The cash decreased by $7670 due to paying the penalty instead of being available to pay for deductible expenses.

The good news is we have had success getting penalties abated.

I am assuming all the tax returns are filed before 5-15-14.

According to a tax lawyer I spoke to without using your name, all you have access to are the standard provisions for getting reasonable cause relief. Reasonable cause relief would not be met. You will see that these reasonable cause relief from the IRS audit manual do not fit you facts and circumstances.

However, First-Time Abatement (FTA) may also be available for the oldest tax year. However FTA assumes clean compliance for the 3 years prior to that year and your S corporation became active in 2011.

Since there are multiple years of non-filing here, the use of FTA may prove to be inconsequential. However, if reasonable cause is ultimately not available, then FTA should at least provide some relief. I will look to: IRM @ (11/25/11) for more information on FTA.

Internal Revenue Manual (11-25-2011)
Reasonable Cause

Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining their tax obligations but nevertheless failed to comply with those obligations.

In the interest of equitable treatment of the taxpayer and effective tax administration, the non-assertion or abatement of civil penalties based on reasonable cause or other relief provisions provided in this IRM must be made in a consistent manner and should conform with the considerations specified in the IRC, Treasury Regulations (Treas. Regs.), Policy Statements, and IRM Part 20.1, Penalty Handbook.

Reasonable cause relief is not available for all penalties; however, other exceptions may apply.

For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but nevertheless was unable to comply with a prescribed duty within the prescribed time, will be considered.

If a reasonable cause provision applies only to a specific IRC section, that reasonable cause provision will be discussed in the IRM 20.1 section relating to that specific IRC section. See Exhibit 20.1.1-1, Penalty Relief Application Chart.

When considering the information provided in the following subsections, remember that an acceptable explanation is not limited to those given in IRM 20.1. Penalty relief may be warranted based on an “other acceptable explanation,” provided the taxpayer exercised ordinary business care and prudence but was nevertheless unable to comply within the prescribed time. See IRM, Ordinary Business Care and Prudence.

The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that the taxpayer acted in good faith or that the taxpayers failure to comply with the law was not due to willful neglect. See specific IRM 20.1 sections for the rules that apply to a specific IRC penalty section. See IRM, Organization of IRM 20.1.

Taxpayers have reasonable cause when their conduct justifies the non-assertion or abatement of a penalty. Each case must be judged individually based on the facts and circumstances at hand. Consider the following in conjunction with specific criteria identified in the remainder of this subsection:

What happened and when did it happen?

During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax, and/or otherwise complying with the law?

How did the facts and circumstances result in the taxpayer not complying?

How did the taxpayer handle the remainder of their affairs during this time?

Once the facts and circumstances changed, what attempt did the taxpayer make to comply?

Reasonable cause does not exist if, after the facts and circumstances that explain the taxpayer’s non-compliant behavior cease to exist, the taxpayer fails to comply with the tax obligation within a reasonable period of time.

If you enjoyed this article, please consider sharing it!
Icon Icon Icon


No Obligation FREE Evaluation: Guaranteed to Reduce Your Taxes






About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

Get In Touch

JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com