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By David I. Kempler, Esq. and Elizabeth Carrott
Buchanan Ingersoll & Rooney PC, Washington, DC
The IRS Chief Counsel's Office issued a program manager
technical advice memorandum (PMTA 2013-15) advising on the
application of multiple failure to file penalties to S
corporations, certain partnerships and real estate mortgage
investment conduits (REMICs). This memorandum clarifies that
taxpayers will not be subject to double penalties where a
late-filed return is missing relevant information. The memorandum
further provides guidance on how the penalty will be
Under §6651(a)(1), a taxpayer who fails to file any income tax
return (whether individual, corporation, estates or trusts) or gift
tax and estate tax return on or before the due date prescribed for
filing, including any extensions, is subject to a penalty equal to
5% of the net amount of tax due for each month or fraction of a
month the return is not filed, not to exceed 25% in the aggregate.
Under §§6698(a) and 6699(a), any partnership or S Corporation that
fails to file its information return on time or whose return is
incomplete is subject to a penalty of $195 times the number of
partners or shareholders in the partnership or S corporation during
any part of the taxable year, for each month or fraction of a month
that the failure continues, not to exceed 12 months.
The Chief Counsel's Office considered first whether when a
taxpayer files a late U.S. Income Tax Return for an S Corporation
(Form 1120S), the taxpayer may be subjected both to the failure to
file penalty under §6651(a)(1) and the penalty under §6699(a)(1).
The Chief Counsel's Office then considered whether when a taxpayer
files a late Electing Large Partnership Return (Form 1065-B) or
U.S. REMIC Return (Form 1066) the taxpayer will be subjected both
to the failure to file penalties under §6651(a)(1) and under
§6698(a)(1). In each case, the Chief Counsel's Office determined
that the application of two failure to file penalties to "the same
late-filed return would be inconsistent with the Service's policy
position with respect to penalties, which is that penalties exist
to encourage voluntary compliance." Moreover, the Chief Counsel's
Office concluded that it was unlikely that a court would uphold the
imposition of both two failure to file penalties with respect to
the same untimely return.
However, with respect to a partnership or an S-corporation
return required to be filed under authority of §6031 (for
partnerships, including REMICs) or §6037 (for S corporations), the
Chief Counsel's Office concluded that, if the return is both filed
late and failed to show all required information, then the taxpayer
may be subjected both to the penalties for failure to file under
§6698(a)(1) (for partnerships, including REMICs) or §6699(a)(1)
(for S corporations) and for failure to show required information
under §6698(a)(2) (for partnerships, including REMICs) and
§6699(a)(2) (for S corporations). This may occur where a late
filed return is missing information. The Chief Counsel's
Office further concluded that penalty for failure to file and the
failure to show required information each begins on the return due
date, and the failure to file runs until the return is filed and
the failure to show required information runs until the missing
information is received. However, the Chief Counsel's Office
advised that neither §6698 (for partnerships, including REMICs) nor
§6699 (for S corporations) imposed two penalties, rather than one
penalty may be imposed for either of two reasons. Where the IRS
first assesses a failure to file for less than the full 12-month
and the late return is incomplete, the Chief Counsel's Office
advised that the IRS may assess a penalty for failure to show
required information for additional months of noncompliance.
If a taxpayer fails to file a return, the IRS can prepare a
"substitute for return" pursuant to §6020(b). When IRS prepares a
substitute return for a partnership (including REMICs) or
S-corporation, the Chief Counsel's Office advised that §6698 (for
partnerships, including REMICs) or §6699 (for S corporations)
should be computed until the earlier of the date the taxpayer files
a complete return or 12 months after the return due date,
regardless of when substitute return is filed.
For more information, in the Tax Management Portfolios, see
Tarr and Drucker, 634 T.M., Civil Tax Penalties, and
in Tax Practice Series, see ¶3830, Penalties.
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