The IRS extended the April 15 due date in 2020 for personal tax returns (1040) and corporate returns (1120) but not the March 15 due date for LLC or partnerships (Form 1065). The penalties for late filing are starting to roll out, and if you receive a notice with a penalty amount, you might be shocked. Here’s what to do.
As the IRS explains, “A penalty is assessed against the partnership if it is required to file a partnership return and it (a) fails to file the return by the due date, including extensions, or (b) files a return that fails to show all the information required, unless such failure is due to reasonable cause. The penalty is $205 for each month or part of a month (for a maximum of 12 months) the failure 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.”
In 2020, with all the confusion over changes to deadlines with Covid-19, I suspect many LLC owners are going to be hit with this penalty. Here’s an example: Our Company, LLC, owned by two members, filed their LLC’s 1065 in early July, mistakenly thinking that the Covid-19-related extension given to individuals (Form 1040) and Corporations (Form 1120) applied to them as well. In reality, the IRS did not extend the LLC deadline, which is normally March 15 rather than April 15.*
In late July, Our Company, LLC receives a CP notice from the IRS with a penalty of $1,640. The IRS considered their 1065 return to be four months late – March, April, May, June, because it counts part of a month – so with two owners the penalty is 2 times $205 times 4 or $1,640. Ouch.