Partnerships are required to file Form 1065, U.S. Return of Partnership Income, annually to report their income, deductions, credits, and other financial information. Timely filing is essential, as late filings incur penalties. One of the most significant penalties for partnerships is the so-called $220 per partner per month penalty, officially known as the “Section 6698 penalty.” This blog provides a comprehensive explanation of how this penalty works, how it is calculated, and what partnerships can do to avoid or mitigate it.
📅 What Is the $220/Form Partner Penalty?
The $220 penalty is assessed against partnerships that fail to file Form 1065 on time, including extensions. The penalty amount is based on the number of partners the partnership had during any part of the tax year. Specifically, the IRS charges $220 per month or part of a month the return is late, multiplied by the total number of partners.
🔢 How Is the Penalty Calculated?
The formula for calculating the penalty is:
Penalty = $220 × Number of months late × Number of partners
The penalty accrues for each month (or partial month) the return remains unfiled, up to a maximum of 12 months.
Example Calculation:
If a partnership with 8 partners files its Form 1065 4 months late, the penalty would be:
- $220 × 4 months × 8 partners = $7,040
This amount can be substantial, especially for partnerships with many partners or prolonged delays.
📆 When Does the Penalty Apply?
The penalty applies when:
- The partnership fails to file Form 1065 by the due date (generally the 15th day of the third month after the end of the tax year, e.g., March 15 for calendar-year partnerships).
- The partnership fails to file by the extended due date if it requested an extension using Form 7004.
Remember, filing an extension only delays the filing deadline, not the payment deadline.
⏳ Maximum Penalty
The $220 per partner per month penalty is capped at 12 months, meaning the maximum penalty is:
$220 × 12 months × Number of partners
After 12 months, no additional monthly penalties accrue for failure to file, although interest and other enforcement actions may still apply.
🛡️ Can the Penalty Be Reduced or Abated?
Yes. The IRS may waive or reduce the penalty if the partnership can demonstrate reasonable cause for the late filing. Examples of reasonable cause include:
- Serious illness or death of a partner or key personnel
- Natural disasters or other uncontrollable events
- Reliance on incorrect advice from a tax professional
To request penalty abatement, the partnership should submit a written statement explaining the reasons for the late filing and provide supporting documentation.
💡 How to Avoid the $220 Penalty
- File on time: Ensure Form 1065 is filed by the due date or within the extension period.
- Request an extension: File Form 7004 by the original due date to extend your filing deadline by six months.
- Maintain accurate partner records: The penalty is based on the number of partners, so accurate tracking helps avoid miscalculations.
- Consult a tax professional: Especially for partnerships with many partners or complex structures.
📞 What If You Can’t File on Time?
If you anticipate filing late, take these steps:
- File Form 7004 to obtain an extension if still within the original filing deadline.
- File the return as soon as possible to minimize penalty months.
- Communicate with partners to ensure they receive Schedule K-1s timely for their individual filings.
- Consider penalty abatement requests if you have reasonable cause for delay.
✅ Final Thoughts
The $220 per partner per month penalty for late Form 1065 filings can lead to significant financial consequences for partnerships, especially those with many partners. Timely filing and extensions are the best ways to avoid this penalty. If circumstances cause delays, prompt filing and requesting penalty relief can reduce the financial impact. Partnerships should also maintain accurate records and consult tax professionals to navigate these rules effectively.
