How to Get a 1065 Late Filing Penalty Waiver

Partnerships in the United States use Form 1065, U.S. Return of Partnership Income, to report their income, gains, losses, deductions, and credits. This is an information return, meaning the partnership itself does not pay tax, but “passes through” any profits or losses to its partners. The standard deadline for filing Form 1065 is the 15th day of the third month after the end of the partnership’s tax year.

Failing to file this return on time can lead to penalties from the Internal Revenue Service (IRS). These financial assessments can accumulate quickly, creating a burden for the business and its partners. The IRS provides specific pathways for relief, which depend on the partnership’s characteristics and the reasons for the delayed filing.

The Form 1065 Late Filing Penalty

The penalty for failing to file Form 1065 by its due date, including extensions, is calculated based on the number of partners and the length of the delay. The penalty is assessed for each month, or part of a month, that the return is late. This penalty period can extend for a maximum of 12 months.

The base penalty amount is adjusted for inflation. For returns due in 2025, the penalty is $245 per partner per month. The total monthly penalty is the base amount multiplied by the number of individuals who were partners at any time during the tax year.

Consider a partnership with eight partners that files its return four months and ten days late. The delay is treated as five full months for penalty calculation purposes. With a penalty rate of $245 per partner, the monthly penalty would be $1,960 (8 partners x $245), and the total penalty would amount to $9,800.

The penalty is assessed against the partnership entity itself, not the individual partners directly. The purpose of the penalty is to encourage compliance and ensure the IRS receives the necessary information to verify that partners have correctly reported their share of the partnership’s activities.

Criteria for Automatic Penalty Relief

Certain small partnerships may qualify for a waiver of the late filing penalty through an administrative provision known as Revenue Procedure 84-35. This procedure establishes a presumption of “reasonable cause” for the late filing if a specific set of criteria is met, providing an automatic path to penalty relief.

To qualify for this relief, the partnership and its members must meet all of the following conditions for the taxable year:

• The partnership must have 10 or fewer partners; a husband and wife who file a joint tax return are considered a single partner.
• All partners must be natural persons or the estate of a deceased partner, and they must be U.S. residents.
• Each partner must have timely and fully reported their distributive share of all partnership items on their personal income tax returns.
• Each partner’s share of every partnership item must be the same as their share of every other item, a condition known as the “same-share” rule.
• The partnership must not have elected to be subject to the consolidated audit proceedings.

Demonstrating Reasonable Cause

If a partnership does not meet the criteria for automatic relief under Revenue Procedure 84-35, it may still be able to get a penalty waiver by demonstrating reasonable cause. This is a facts-and-circumstances test where the partnership must prove that it exercised ordinary business care and prudence but was still unable to file the return on time.

A common example of a valid reason is a fire, natural disaster, or other casualty that destroys the partnership’s business records. The partnership would need to provide evidence like fire department reports or insurance claims to substantiate the claim and show the event made it impossible to file.

The death, serious illness, or unavoidable absence of the partner responsible for tax matters can also constitute reasonable cause. This requires documentation such as a death certificate or a letter from a physician, which must link the individual’s situation to the partnership’s inability to file.

Another basis for reasonable cause is the inability to obtain the necessary records to complete the return, despite making prudent efforts. This could involve records held by a third party that were not provided in a timely manner. Supporting evidence might include copies of written requests sent to the third party or a log of communication attempts.

The Process for Requesting a Waiver

The method for requesting a penalty waiver depends on whether the partnership qualifies for automatic relief or must argue for reasonable cause. The procedural steps are distinct for each path.

For partnerships that meet the conditions of Revenue Procedure 84-35, the process is straightforward. The partnership should attach a statement to its late-filed Form 1065. This statement must affirm that the partnership meets all requirements for relief and state that all partners have timely filed their individual returns reporting their full share of partnership items.

If the partnership does not qualify for automatic relief, it must request an abatement based on reasonable cause. This is done in response to a penalty notice from the IRS, such as a CP162 notice. The partnership should write a letter that includes its name, taxpayer identification number (TIN), the tax year, and a detailed explanation of the reasonable cause for the late filing.

This written explanation should be accompanied by copies of all supporting documentation that substantiates the claim. The letter and its attachments should be mailed to the IRS service center that issued the penalty notice. Alternatively, the request and supporting documents can be attached to the late-filed Form 1065 if a penalty notice has not yet been received.