Are you a member of a partnership or of a limited liability company that is treated as a partnership for tax purposes (a “partnership”)? Did your partnership file its 2016 tax return late this year? How about K-1s? Were these forms issued late to its partners? Then this post may be for you.
Late last week, the IRS issued guidance providing penalty relief for certain partnerships that did not file the required tax return, on IRS Form 1065 (“U.S. Return of Partnership Income”), or issue Schedule K-1s (“Partner’s Share of Income, Deductions, Credits, etc.”) to its partners, by the new due date for taxable years beginning in 2016.
“New due date?” you say. Yep, this post is for you.
New Due Date
The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “Act”), amended the Code to change the date by which a partnership must file its annual return. https://www.congress.gov/114/plaws/publ41/PLAW-114publ41.pdf; https://www.law.cornell.edu/uscode/text/26/6072
The due date for filing the annual return of a partnership – or for requesting an extension of time to file such return (using IRS Form 7004, “Application for Automatic Extension of Time To File”) – changed from the fifteenth day of the fourth month following the close of the taxable year (April 15 for calendar-year partnerships) to the fifteenth day of the third month following the close of the taxable year (March 15 for calendar-year partnerships).
A partnership must also issue a Schedule K-1 to each of its partners – reporting such partnership information as the partners may need to complete their own income tax returns, including each partner’s share of the partnership’s income and deductions – by the same due date. Partnerships that receive an extension of time to file Form 1065 receive a concurrent extension of time to furnish their partners with Schedules K-1.
The new due date applies to the returns of partnerships for taxable years beginning after December 31, 2015.
Penalty for Late Filing
It seems that you and your partnership were not alone. Many partnerships filed their 2016 returns (for their first taxable year beginning after December 31, 2015), or requests for an extension of time to file such returns, by the date previously required by the Code (April 15 in the case of a partnership with a taxable year ending December 31); in other words, they were filed late.
Partnerships that fail to timely meet their obligations to file their partnership tax returns by the specified due date (with regard to extensions), or to furnish Schedule K-1s to their partners, will be assessed a monetary penalty, unless such failure is due to reasonable cause (for example, reliance upon the advice of a tax professional whose competence the taxpayer has no reason to doubt).
The penalty is $195 for each month or part of a month (for a maximum of 12 months) the failure to file Form 1065 continues, multiplied by the total number of persons who were partners in the partnership during any part of the partnership’s tax year for which the return is due.
For each failure to furnish Schedule K-1 to a partner when due, a $260 penalty may be imposed for each Schedule K-1 for which a failure occurs.
It should be noted that where a partnership has failed to timely file its Form 1065, it is likely that it has also failed to file additional tax returns that are required to be filed by the same due date as the Form 1065, such as IRS Form 5471, “Information Return of U.S. Persons with Respect to Certain Foreign Corporations;” such additional failures may expose the partnership to the imposition of other penalties.
Relief from Penalties
If not for the Act, these returns and requests for extension of time to file would have been timely under prior law.
Because of that fact, and given the number of late filings, the IRS recently announced that it will provide penalty relief to partnerships that filed certain untimely returns, or untimely requests for extension of time to file those returns, for the first taxable year that began after December 31, 2015, by the fifteenth day of the fourth month following the close of that taxable year. https://www.irs.gov/pub/irs-drop/n-17-47.pdf
The IRS will grant relief from the late filing penalties described above for any return described above for the first taxable year of any partnership that began after December 31, 2015, if the following conditions are satisfied:
- the partnership filed the Form 1065 or other return required to be filed with the IRS, and furnished Schedules K-1 to the partners, by the date that would have been timely under the Code before its amendment by the Act; or
- the partnership filed a request for an extension of time to file by the date that would have been timely under the Code before amendment by the Act and files the return with the IRS, and furnishes Schedules K-1 to the partners, by the fifteenth day of the ninth month after the close of the partnership’s taxable year. This relief will be granted automatically for penalties for failure to timely file a partnership return on Form 1065, and any other returns for which the due date is tied to the due date of the Form 1065. In addition, partnerships that qualify for this relief and that have already been assessed penalties can expect to receive a letter within the next several months notifying them that the penalties have been abated.
Do the Right Thing
The Code and the Regulations issued thereunder are full of instances in which a taxpayer may be granted relief for a late filing, a late election, an inadvertently voided election, etc.
It is comforting to know that, in the “appropriate” circumstances, the IRS may provide relief to a “qualifying” taxpayer.
The granting of such relief, however, generally remains within the discretion of the IRS. Moreover, what if the taxpayer’s situation does not satisfy the threshold criteria for consideration by the IRS for relief?
A taxpayer cannot “plan” on the basis of the IRS’s generosity and understanding. Rather, a taxpayer must consult his tax advisers to ensure that he “does the right thing” from a tax perspective, whether in undertaking a business transaction, or in reporting the tax consequences of such a transaction. It is often too late to fix a problem after it has been created, and the IRS is not charged with helping taxpayers get out of problems of their own doing.