S corporation and partnership returns are pass-through returns because S corporations and partnerships usually don’t pay income tax at the business level. Instead, S corporations and partnerships pass income, deductions, credits, etc., to shareholders and partners, as reported on the Schedule K-1 information statement. Shareholders and partners then report Schedules K-1 on their own income tax returns and pay the tax they owe.
The IRS matches the information reported on S corporation and partnership returns (and their corresponding Schedules K-1) to information reported on income tax returns.
To make sure that small businesses comply with filing rules, the IRS assesses failure to file (late-filing) penalties.
Three consequences of filing returns late
Know these facts:
1. It’s illegal not to file.
The law requires your business to file every year that it has a filing requirement. The government can hit you with civil and even criminal penalties for failing to file a return.
2. Prepare to pay a penalty.
For a return where no tax is due, the failure to file (late-filing) penalty is assessed for each month or part of a month that the return is late or incomplete up to a maximum of 12 months. The amount of the penalty is $200 for 2017 returns, multiplied by the number of shareholders/partners in the S corporation/partnership during any part of the tax year.
If tax is due (uncommon), the penalty is the amount stated above plus 5% of the unpaid tax for each month or part of a month that the return is late, up to a maximum of 25% of the unpaid tax. The penalty for filing late is 5% of the taxes you owe per month for the first five months – up to 25% of your tax bill. The IRS will also charge you interest until you pay off the balance.
3. You may be held personally liable if you are a partner.
This penalty is assessed against the partnership. However, the partners or investors are held individually liable for the penalty to the extent that the partners or investors are liable for any partnership debts. For example, if Partner A is a general partner and is personally liable for 100% of the partnership’s debt, then Partner A is personally liable for 100% of the penalty and the IRS has the authority to personally collect from Partner A.
The failure to file penalty for S corporations is assessed against the S corporation, not against any individual shareholder. Shareholders are not directly liable for the penalty.
Getting back into compliance
Remember, the law says you must file all required tax returns. If you haven’t met that obligation, you should get back into good standing with the IRS.
For most people, the further back in time you go, the less reliable your records are. If this is the case for you, don’t worry. There’s something you can do about it. You or an authorized tax professional acting on your behalf can research your account at the IRS. Your IRS transcripts will help you uncover and report all the income that’s been reported to the IRS.
You can do something about those penalties
If you filed a S corporation or partnership return late in the past few years, you have likely seen a penalty notice for late filing. Your tax pro may be able to help you with S corporation and partnership late-filing penalties by requesting:
Penalty abatement due to reasonable cause
Penalty abatement due to first-time penalty abatement or a clean compliance history
“Safe harbor” penalty relief for small partnerships with 10 or fewer partners that meet certain IRS qualifications.
If you haven’t filed all your required small business returns, you won’t have many options until you file them all. Delaying or not filing at all is a bad strategy. The IRS charges (or, “assesses”) a steep penalty for filing late.