File Penalty Abatement for Partnerships - Rev Proc 84-35 -John R. Dundon
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File Penalty Abatement for Partnerships – Rev Proc 84-35

File Penalty Abatement for Partnerships - Rev Proc 84-35

File Penalty Abatement for Partnerships – Rev Proc 84-35

IRS Failure to File Penalty Abatement for Partnerships – Rev Proc 84-35

IF your partnership failed to timely file its IRS Form 1065 and you get penalized by the IRS you should consider seeking relief from or abatement of this penalty under IRS Revenue Procedure 84-35.  The partnership will be notified of the penalty via IRS Notice 162.

In this notice the IRS posits generally that if the following criteria are met the partnership qualifies for penalty abatement relief for late filing of IRS Form 1065.

  1. A domestic partnership composed of 10 or fewer partners and coming within the exceptions outlined in section 6231(a)(1)(B) of the Code will be considered to have met the reasonable cause test and will not be subject to the penalty for the failure to file a complete or timely partnership return, provided that the partnership, or any of the partners, establishes, if so requested by the Internal Revenue Service, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns.
  2. Partnerships having a trust or corporation as a partner, tier partnerships, and partnerships where each partner’s interest in the capital and profits are not owned in the same proportion, or where all items of income, deductions, and credits are not allocated in proportion to the pro rata interests, do not come within the exception provisions of section 6231(a)(1)(B) of the Code and, are subject to the penalty.
  3. Each partner during the tax year was a natural person (other than a non-resident alien), or the estate of a natural person.  A husband/wife filing a joint personal income tax return count as 1 partner.
  4. Each partner’s proportionate share of any partnership item is the same as his proportionate share of any other partnership item.
  5. The partnership did not elect to be subject to the rules for consolidated audit proceedings under IRC §§ 6221 through 6234.

The IRS musings on its website are NOT deemed ‘substantial authority’ and cannot necessarily be ALWAYS relied upon.

Long Story Short – It does not matter whether a partnership is a part of the centralized partnership regime or whether the partnership elects out basically stating that:

  • TEFRA (enacted in 1982) contained a definition of a small partnership  as 10 or fewer partners, partners must be natural, when partner allocations of income/expense are the same.
  • RP 84-35 was issued to reinforce the definition of a small partnership and relief for late filing and replaced a previous Rev Proc.
  • “The IRS did not express an intent that later amendments to TEFRA audit procedures would affect the application of the exception to the partnership failure to file penalty”
  • The BBA rules then repealed TEFRA, effective after 2017, and automatically apply to a partnership unless a partnership elects out of the regime on their tax return
  • These are the key points of the Memo negating point 5 above
    • “Thus, the BBA rules are applicable to such partnerships for which the relief provided in Revenue Procedure 84-35 would be relevant”
    • “Moreover, the legislative history of section 6698, which is the basis for the relief provided in Revenue Procedure 84-35, is still relevant, and the scope of the section 6698 penalty for failure to file a partnership return has not been affected by the repeal of the TEFRA provisions. Thus, Revenue Procedure 84-35 is not obsolete and continue to apply”
Needles to say neither one of us really know why the IRS website uses this verbiage immediately below since a partnership does NOT elect to be subject to the consolidated audit procedures, but rather is automatically a part unless the partnership elects out.  Other than of course to quip that it is one thing to read the notices and the web site.  It is another thing altogether to have a keen understanding of the Statutes, Regulations, Procedures, Rulings and other deemed substantial authority like Chief Counsel Advice Memos.
  •  “The partnership has not elected to be subject to the consolidated audit procedures under I.R.C. §§ 6221 through I.R.C. § 6233 (subchapter C).” …. is a statement that unto itself is not forthcoming.
Other Things I’ve learned
  • When it comes to the IRS your only friends are the code, the regulations, the revenue procedures/rulings and the chief counsel memos.
  • In determining whether a partner has fully reported the partner’s share of the income, deductions, and credits of the partnership, the nature and materiality of any error or omission will be considered.
  • IF de minimis the penalty may not be asserted. If a substantially material error or omission is found it will be.
  • If a partnership of 10 or fewer partners happens to not be automatically excepted from the penalty imposed the partnership may show other reasonable cause for failure to file a complete or timely partnership return appeal this penalty following your appeal rights taking particular care at drafting a letter asking for abatement under IRS Revenue Procedure 84-35.

This IRS Chief Counsel memo might help further your understanding.  For more on how to file penalty abatement for partnerships – Rev Proc 84-35 contact me.