The Internal Revenue Code Section 6698(a)(1) Penalty
Understand the Section 6698 penalty assessed on partnerships for late returns. Learn the standards for relief and the procedural steps for abatement.
Internal Revenue Code Section 6698 establishes a penalty against a partnership that does not file its required tax return, Form 1065, on time or files an incomplete return. The assessment is not triggered by a manual review but is automatically calculated and charged by Internal Revenue Service computer systems. This systematic application means a penalty notice is often the first indication a partnership has of its filing deficiency.
Calculating the Section 6698 Penalty
The penalty calculation is based on the number of partners and the duration of the delay. For partnership returns required to be filed in 2025, the penalty is $245 per partner for each month, or part of a month, that the return is late. This monthly charge is capped at a maximum of 12 months.
To illustrate, consider a partnership with five partners that files its Form 1065 three months and ten days after the due date, including any extensions. For penalty calculation purposes, the fraction of a month counts as a full month, so the lateness is considered four months. The total penalty would be calculated by multiplying the monthly rate ($245) by the number of partners (5) and then by the number of months late (4), resulting in a total penalty of $4,900.
This calculation is applied regardless of whether the partnership had a net profit or loss for the year. The penalty is for the failure to provide required information on time, not for any tax owed. Because the penalty accrues for each person who was a partner at any point during the tax year, it can escalate quickly for partnerships with many members.
Qualifying for Penalty Relief
A partnership may qualify for penalty relief if it can demonstrate its failure to file a timely and complete return was due to reasonable cause, not willful neglect. The partnership must show it exercised ordinary business care and prudence but was still unable to file on time. Common situations that the IRS may accept as reasonable cause include the death or serious illness of a partner responsible for filing or the destruction of partnership records by a fire or natural disaster.
Another basis for relief is relying on incorrect advice from a competent tax professional. To use this reason, the partnership must demonstrate that it provided the advisor with all necessary and accurate information and that the resulting error was the advisor’s. Simply forgetting the deadline or not having the funds to pay any tax due are not considered valid reasons for penalty abatement.
A specific administrative waiver, outlined in Revenue Procedure 84-35, provides a safe harbor for certain small partnerships. To qualify, the partnership must have ten or fewer partners for the entire taxable year, and all partners must be natural persons or an estate of a deceased partner. Each partner must have also fully and timely reported their share of the partnership’s items on their personal income tax returns. If all these conditions are met, the IRS considers the partnership to have met the reasonable cause standard automatically.
How to Request Penalty Abatement
The process for requesting penalty abatement typically begins upon receiving a notice from the IRS, such as a CP162 notice, which details the assessed penalty. The partnership should not pay the penalty if it believes it qualifies for relief. Instead, it must submit a written request for abatement.
The abatement request letter should identify the partnership by its legal name, Employer Identification Number (EIN), and address. The letter must also reference the tax year, Form 1065, and the specific notice number received. The core of the letter is a clear statement that the partnership is requesting abatement of the penalty.
The letter must present a factual argument supporting the request. If seeking relief based on reasonable cause, provide a detailed narrative of the events that prevented a timely filing. If seeking relief under Revenue Procedure 84-35, the letter should state that the partnership meets all the necessary criteria for the waiver. After mailing the letter, the partnership can expect to receive an acknowledgment from the IRS, though a final determination may take several months.