How To Get Penalties Waived?
For many S-corp and partnership owners, the first time they learn about per-partner and per-shareholder late-filing penalties is when the IRS sends a bill that looks far larger than the mistake that caused it.
What surprises most people is how fast the penalty multiplies, and how disconnected the number feels from the reality of running a small or mid-sized business.
If you’ve been hit with one of these penalties, you’re probably asking the same thing nearly every client asks me… “Is there any way to get this removed???”
Why These Penalties Feel Shockingly High
S-corporations and partnerships occupy a strange category in the tax world. They’re “pass-through” entities, which means many business owners assume the IRS doesn’t care much about the entity return itself. Finding out that a late Form 1120-S or 1065 can trigger thousands of dollars in penalties, even when no tax is due, is confusing and often infuriating.
The explanation is in the fine print of IRC 6699 (for S corporations) and IRC 6698 (for partnerships). The IRS imposes a penalty on each shareholder (for S corps) or partner (for partnerships), calculated for each month or partial month the return is late. Since the penalty amounts are adjusted annually for inflation, the fees steadily increase.
For the 2024 tax year, the penalty is $245 per month per owner, up to 12 months. That number alone seems manageable… until you multiply it.
Imagine a three-owner S-corp filing four months late. Suddenly, a modest penalty becomes $2,940, even though the return showed no tax due.
Or imagine a five-partner partnership filing six months late. That penalty amounts to approximately $7,350 for missing a deadline.
This is why business owners often feel blindsided! Missing a filing deadline doesn’t feel like a $7,000 mistake. But according to the statute, it can be.
So… Can the Penalty Be Reduced?
Many late-filing penalties can actually be reduced or even removed. The IRS offers several helpful ways to get penalty relief, and choosing the right option depends on your unique situation, your history of compliance, and why the return was filed late.
For business owners, there are typically three main routes to seek relief, and knowing each one can help you to take action rather than pay a penalty you might not owe.
- Reasonable Cause Relief – If you show an outside control prevented timely filing, and you acted responsibly after discovering the issue, the IRS may remove the penalty. Reasonable cause applies when a key individual was ill, a disaster interrupted operations, records were missing, or a previous accountant failed to file despite being engaged. Effectiveness relies on clarity: providing a detailed timeline, specific facts, supporting documents, and proof of good-faith effort is more persuasive than vague statements such as “we were busy.”
- First-Time Abatement (FTA) – FTA is a one-time administrative waiver that can remove a year’s penalties without a detailed explanation. Eligibility depends on your filing history, not hardship. If your business filed all required returns without major penalties in the past three years, you may qualify. The IRS doesn’t advertise this, and tax software rarely alerts you, but it can save thousands.
- Relief for Certain Small Partnerships – Partnerships reporting accurate income shares on their returns might qualify for relief even if their partnership return was late. The IRS may grant an abatement if no tax revenue was lost. This is especially relevant for small, closely held partnerships and is worth considering before paying potentially unnecessary penalties.
Writing a Strong Request for Penalty Relief
A penalty relief letter should be structured, factual, and easy for the IRS to follow.
Start by identifying the penalty and clearly stating what relief you’re requesting. Then lay out a timeline of events. Explain, in specific terms, what prevented timely filing, and demonstrate how you acted in good faith, not only before the return was late but after you found the problem.
Show what has changed, such as hiring a new CPA, new procedures, a new calendaring system, or new computers. Attach supporting documents to build a stronger, evidence-based narrative rather than relying on emotional appeals.
What to Do When You Receive a Penalty Notice
Before drafting a relief request, verify the IRS’s calculations. Confirm the filing date, the number of owners, and whether an extension was properly filed. Errors in IRS processing happen more often than most people think.
Once you’ve confirmed the details, determine whether you qualify for First-Time Abatement. If so, it may be the fastest way to remove the penalty. If not, or if you have multiple late years, reasonable cause may be more effective.
When It’s Time to Get Help
Many business owners can handle small or straightforward penalty requests on their own. But when penalties reach thousands of dollars, span multiple years, or arise from more complex circumstances, guidance from a tax attorney can make a substantial difference.
I help business owners understand the penalty calculation, evaluate their relief options, and prepare a compelling request that speaks the IRS’s language.
If you’d like my office to review your penalty notice, send me a message or give me a call!
