Partnership and S corporation late filing penalty: $260 per owner per month, and four ways to get it removed

How the penalty is computed

Sections 6698 (partnerships) and 6699 (S corporations) use the same formula: a base rate, times the number of persons who were partners or shareholders at any time during the tax year, times the number of months or parts of a month the return is late, capped at 12 months. The penalty applies even though the entity itself pays no income tax, because the return is what lets the IRS match the owners’ K-1s.

Three features make it bigger than people expect. “Part of a month” means a return filed one day after the deadline is one full month late. The owner count includes anyone who held an interest during the year, so a fund that admitted investors in stages counts all of them. And the 12-month cap stops the clock but not the multiplier: a 40-owner entity that never files owes 40 × 12 × $260 = $124,800 for a return due in 2027.

With an extension, the months are counted from the extended due date, so the third row runs from September 15, 2027.

Why the owner count is the lever

The rate is fixed by the year and the months are capped, so the number that moves the penalty is the owner count, and the statute counts every person who was a partner or shareholder at any time during the tax year. A real estate fund that closed on 18 investors in February, admitted 12 more in a second closing in August and bought out 2 of them in December has 30 owners for the year, not 28. An S corporation whose sole shareholder transferred half the stock in June has two. Each extra owner adds $260 for every month the return is late, so the same one-month slip costs a two-owner entity $520 and a 60-investor fund $15,600.

The count also decides which relief is open. The Rev. Proc. 84-35 statement is only available to partnerships with 10 or fewer partners, all individuals or estates, so it is the small family partnership’s route, not the syndication’s. Larger entities rely on first-time abatement, which does not depend on size, or on reasonable cause.

Incomplete returns and the missing-K-1 trap

Sections 6698(a)(2) and 6699(a)(2) apply the same per-owner, per-month rate to a return that is filed on time but does not show the information required, including the Schedules K-1. The IRS bills it on CP162B. The trap is that first-time abatement covers only the late-filing version of the penalty, not the incomplete-return version, so a return rushed out on March 15 with a placeholder K-1 can end up worse off than a return extended to September 15 and filed complete. If the numbers will not be final by March, the extension is the safer path. A separate notice, CP162, is issued when a partnership that was required to e-file its return filed on paper instead.

Interest, and what happens if you ignore the notice

Interest runs on an unpaid penalty from the notice date at the underpayment rate, 7% for the fourth quarter of 2026, compounded daily. If the CP162A is not answered, a CP161 follows showing the balance due with penalty and interest. Respond inside the time the notice gives, with the relief request you are relying on. If the penalty has already been paid, Form 843 claims a refund within three years of filing or two years of payment under §6511; the IRS applies first-time abatement before it considers reasonable cause, so a short request citing the clean history is enough to start.

Which rate applies: returns due in 2025, 2026 and 2027

The base rate is indexed each year and keyed to the year the return is due, not the tax year. For a calendar-year entity:

A fiscal-year entity uses the rate for the calendar year in which its return is due. The same rate applies to a return that is filed on time but is incomplete, for example one missing K-1s or required schedules, under §6698(a)(2) and §6699(a)(2).

The notices: CP162, CP162A and CP162B

• CP162A: the return was filed late. The notice, updated in August 2026, includes the Rev. Proc. 84-35 instructions for small partnerships.
• CP162B: the return was incomplete.
• CP162: a partnership failed to e-file when it was required to.
• CP161 follows if the balance stays unpaid, with penalty and interest. Interest runs at the underpayment rate, 7% for the fourth quarter of 2026, compounded daily.

Relief 1: first-time abatement

The late-filing penalties under §6698(a)(1) and §6699(a)(1) are covered by first-time abatement. If the entity filed the same return on time for the three prior years and had no penalties in those years (other than the estimated-tax penalty), the IRS removes the penalty without asking why. Ask by replying to the CP162A in writing, by calling the number on the notice, or on Form 843. A late but unpenalized return in the look-back period disqualifies, and so does an incomplete-return penalty, which FTA does not cover.

Relief 2: Rev. Proc. 84-35 for small partnerships

Partnerships with 10 or fewer partners have a second route that does not depend on history. Rev. Proc. 84-35 treats the late-filing penalty as waived when the partnership returns the CP162A with a statement, signed under penalties of perjury, that:

1. the partnership had no more than 10 partners (a married couple filing jointly counts as one);
2. each partner was a natural person who is not a nonresident alien, or the estate of one;
3. each partner’s share of every item of income, deduction and credit was the same as their share of every other item;
4. the partnership did not elect into the consolidated audit procedures under §§6221 to 6234; and
5. every partner reported their share on a timely filed return.

The IRS confirmed in PMTA 2020-01 that the revenue procedure is not obsolete and continues to apply to tax years after 2017. The limits matter: a partnership with a corporate or trust partner is not covered (CCA 201733013), so a fund with a C corporation investor cannot use it, and a false statement reinstates the penalty. S corporations have no equivalent.

Relief 3: reasonable cause

Both sections waive the penalty for reasonable cause. The IRS standard (IRM 20.1.1.3.2) is ordinary business care and prudence: what happened, when, how it prevented filing, how you handled other obligations at the time, and how quickly you filed once the obstacle cleared. Serious illness, disaster, records that could not be obtained and system problems that blocked an e-filing are recognized grounds. Reliance on the preparer, not knowing the deadline, or being short of funds are generally not enough alone. Mail a written explanation with dated documentation to the IRS office where the return was filed; for an e-file or timeliness dispute the notice gives 800-829-0922.

Relief 4: the automatic exemption for returns due in 2027

IR-2026-83 (July 8, 2026) replaces first-time abatement with an Automatic Exemption from Penalty for eligible returns with original due dates on or after January 1, 2027. Form 1065 is on the list of eligible series, so a 2026 partnership return filed late with a clean three-year history should not be penalized at processing. Form 1120-S is not named, so S corporations should still expect to ask for first-time abatement if a penalty appears.

Avoiding it next year: extend by March 15

Every dollar above is avoidable with a one-page form. Form 7004, filed by the original due date, gives a calendar-year partnership or S corporation an automatic six-month extension, to September 15, 2027 for the 2026 return, with no signature and no explanation. It does not extend any tax the entity owes, but for most pass-through entities there is none at the entity level. The Form 7004 guide walks through the lines, and the K-1s follow the extended date, as the K-1 deadline guide explains.

FundTaxes files Form 7004 for each business you track, and the penalty relief module drafts the CP162A response, the Rev. Proc. 84-35 statement or the reasonable-cause letter for the notice you received. Start a free trial.

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