What Is Section 7519 and How Does It Impact Required Payments?

Section 7519 of the Internal Revenue Code requires certain entities to make advance tax payments to the IRS. These payments help align estimated tax obligations for businesses that report income on a fiscal-year basis while their owners file taxes on a calendar-year basis, preventing mismatches in tax timing.

Entities Covered

This rule applies to partnerships and S corporations that use a fiscal year rather than a calendar year. These pass-through entities allocate income, deductions, and credits to their owners, who report them on their individual tax returns. When the entity’s fiscal year differs from the calendar year, a timing gap occurs, requiring advance payments.

To be subject to this rule, a partnership or S corporation must have elected under Section 444 to maintain a fiscal year. Without this election, most pass-through entities default to a calendar year and are not required to make these payments.

Businesses that commonly fall under this rule include professional service firms such as law firms, medical practices, and accounting firms. These firms often prefer a fiscal year to better match revenue with expenses. For example, a law firm operating as a partnership with a June 30 fiscal year-end must make payments under Section 7519 because its partners report income on a calendar-year basis, creating a tax deferral.

Payment Calculations

The required payment is based on the entity’s deferred income—the taxable earnings allocated to owners that, due to the fiscal-year structure, would not be reported on their individual returns until the following tax year. The IRS calculates this payment using the highest individual income tax rate in effect for the year.

For 2024, the top individual tax rate is 37%, meaning the required payment is 37% of the deferred income. If a partnership has $1 million in deferred income, the required payment is $370,000. This prepayment prevents deferral advantages from fiscal-year reporting.

The payment is not a tax but a prepayment that the entity can later recover if it terminates its fiscal-year election or dissolves. If an entity’s income fluctuates significantly, adjustments may be necessary. The IRS provides Form 8752 for reporting and remitting these payments, along with instructions for making adjustments based on prior-year figures.

Filing Steps

Entities must submit Form 8752, “Required Payment or Refund Under Section 7519,” to the IRS to report and remit the required payment or request a refund. The filing deadline is May 15 following the start of the fiscal year. Late submissions can result in penalties and interest charges.

Accurate reporting requires financial records detailing the entity’s taxable income for the deferral period, including profit and loss statements and K-1 schedules issued to owners. The IRS may request supporting documentation if discrepancies arise. Common errors include miscalculating deferred income or applying the wrong tax rate, both of which can lead to additional scrutiny.

Payments must be made electronically through the Electronic Federal Tax Payment System (EFTPS) or by mailing a check to the IRS. Electronic payments are preferred due to faster processing and immediate confirmation. If an entity cannot pay in full, it may qualify for an installment agreement, though interest and penalties may still apply.

Adjustments and Refunds

If an entity’s financial position changes significantly, it may need to adjust previously submitted payments. Adjustments typically occur when revenue fluctuates, the entity undergoes a reorganization, or it changes its fiscal year-end. These changes affect the deferred income calculation, requiring an updated Form 8752.

Refunds apply when an entity ceases operations, terminates its Section 444 election, or switches to a calendar-year reporting structure. To request a refund, the entity must file a final Form 8752 explaining the change. The IRS may require documentation, especially for large refund claims.

Coordination with Other Provisions

Section 7519 interacts with other tax provisions affecting partnerships and S corporations. Entities must consider how these payments align with estimated tax obligations and overall compliance requirements.

One key consideration is the relationship between Section 7519 payments and estimated tax requirements under Section 6654 for individuals and Section 6655 for corporations. The required payment is a prepayment of tax but does not replace the need for partners or shareholders to make their own estimated tax payments. These payments are also not deductible as a business expense, which affects financial planning.

Structural changes such as mergers, acquisitions, or conversions to a different tax classification also impact Section 7519 payments. If a partnership converts to a C corporation, it must determine whether prior payments can be refunded. Businesses subject to state tax provisions that mirror federal rules must ensure compliance at both levels to avoid discrepancies that could trigger audits.

Consequences for Noncompliance

Failure to comply with Section 7519 can result in financial penalties, interest charges, and administrative complications. Entities that do not make the required payments on time may face penalties.

Penalties for late or insufficient payments accrue interest until the full amount is paid. The IRS may impose failure-to-pay penalties under Section 6651, typically 0.5% of the unpaid tax per month, up to a maximum of 25%. If an entity fails to file Form 8752, additional penalties may apply, and the IRS could take enforcement actions such as liens or levies.

Noncompliance can also lead to broader IRS scrutiny of an entity’s tax reporting. If discrepancies arise related to Section 7519, the IRS may examine other financial records, potentially leading to audits or additional tax liabilities. Maintaining accurate records and ensuring timely compliance helps businesses avoid unnecessary financial and administrative burdens.