The 1065 and Your LLC – How Much in Penalties?!@*#?!
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.
If you are facing this situation, the IRS recommends that you, “send the IRS an explanation and the Service will determine if the explanation meets reasonable-cause criteria.” Explain your reasonable cause to the IRS. If you just started your LLC and this is the first year you needed to submit a 1065, or if you’ve been filing for a while and have always been on time in the past, it is likely that the IRS will grant an abatement of the penalty. Respond to the CP notice with a letter of explanation and a request for the penalty to be forgiven.
Best of luck to you – these are confusing times, and we all need some extra help, consideration, and breaks.
*Note – The reasoning behind why 1065s are due a month earlier (due March 15) than personal or corporate returns (due April 15) is because partnerships and LLCs that file on the 1065 are pass-through entities that don’t actually pay the tax with that 1065 return but rather send the losses/gains/tax owed through to the owners, who then include that on their personal 1040 return. So the thinking is that the 1065 needs to be done a month early so that the necessary information can be sent (via a form called a K-1) to the owners or members in time to include on their personal returns.
Kathryn Hauer, a Certified Financial Planner™, adjunct professor, and financial literacy educator has written numerous articles and several books including the “11-Step, DIY, Comprehensive Financial Plan Workbook” and “Financial Advice for Blue Collar America.” She works to help clients and readers understand and act on complex financial information to keep them and their money safe. She functions as a strong advocate and guiding light for her clients as they move through a murky and unfamiliar financial world. Learn more at her website.