A partnership that files Form 1065 late or submits an incomplete return owes a penalty under Internal Revenue Code Section 6698, and the failure to file partnership return penalty adds up fast: for returns due in 2026, the IRS charges $255 per partner for each month (or partial month) the return is overdue, capped at twelve months.1Internal Revenue Service. Failure to File Penalty Because the charge multiplies across every partner, a small partnership can rack up thousands of dollars in weeks, and a mid-sized firm can face five or six figures. Several relief routes exist, and most partnerships that get hit qualify for at least one of them.
What Triggers the Penalty
Two things set the penalty running. The first is obvious: the partnership misses the filing deadline, including any valid extension.2Office of the Law Revision Counsel. 26 USC 6698 – Failure to File Partnership Return The second catches partnerships off guard: filing a return that is missing required information counts the same as not filing at all.
Every partnership must file Form 1065 each year, reporting income, deductions, credits, and each partner’s share of those items.3Office of the Law Revision Counsel. 26 U.S. Code 6031 – Return of Partnership Income This applies to traditional partnerships and to LLCs taxed as partnerships, and it applies whether or not the entity earned anything. A partnership with zero income still owes the return.
Schedule K-1 is part of the required return. Omit a partner’s K-1, or leave mandatory information off one, and the IRS can treat the whole return as incomplete and assess the penalty as if nothing had been filed.4Internal Revenue Service. Notice 2021-13 – Relief for Partnerships from Certain Penalties Related to the Reporting of Partners’ Beginning Capital Account Balances The penalty is assessed against the partnership itself, though the partners bear the economic weight.
How the Penalty Is Calculated
Three numbers drive it: a per-partner monthly rate, the number of partners during the tax year, and the number of months (or partial months) the failure continues. The statute sets a $195 base that the IRS adjusts for inflation each year and rounds down to the nearest $5.2Office of the Law Revision Counsel. 26 USC 6698 – Failure to File Partnership Return
Recent rates:
- Returns due in 2024: $235 per partner per month
- Returns due in 2025: $245 per partner per month
- Returns due in 2026: $255 per partner per month
The count runs for up to twelve months, so the maximum exposure per partner for a 2025 return due in 2026 is $3,060.1Internal Revenue Service. Failure to File Penalty A partial month counts as a whole month. File one day into the second month and the penalty covers two months, not one. That first day past a monthly threshold is unusually expensive relative to the delay.
Two examples show how quickly it scales. A ten-partner partnership that files a 2025 return three months late owes 10 × $255 × 3, which is $7,650. A fifty-partner firm that misses by seven months owes 50 × $255 × 7, which is $89,250. The bigger the partnership, the more painful the multiplier.
The Small Partnership Exception
Before anything else, check Revenue Procedure 84-35. When a partnership meets every one of the following conditions, the IRS presumes reasonable cause and generally will not impose the penalty:5Internal Revenue Service. Understanding Your CP162B Notice – Section: Revenue Procedure 84-35
- Ten or fewer partners for the year. A married couple filing jointly counts as one partner.
- Every partner is a natural person (excluding nonresident aliens) or the estate of a natural person. A corporation, trust, or another partnership as a partner disqualifies the entity.
- Each partner’s share of every partnership item is proportional to their ownership interest. Special allocations disqualify the partnership.
- Every partner timely filed a personal return that included their share of the partnership’s income, deductions, and credits.
If all four boxes are checked, cite Revenue Procedure 84-35 in the response to the penalty notice. No proof of hardship or unusual circumstances is needed. Meeting the four conditions is the argument.
First-Time Abatement
Partnerships that fall outside the small partnership exception should look next at First-Time Abatement. The IRS includes Section 6698(a)(1) penalties in this administrative waiver.6Internal Revenue Service. IRM 20.1.1 Introduction and Penalty Relief – Section: First Time Abate (FTA)
Three conditions apply:
- The partnership filed Form 1065 for each of the three tax years preceding the penalized year.
- None of those three prior returns has an unreversed penalty assessed against it (estimated tax penalties excluded).
- The partnership has filed the return in question, even if late.
FTA is powerful because a clean compliance history is the whole case. No hardship narrative, no records to produce. Plenty of partnerships qualify and never ask because they don’t know the waiver exists. Starting with 2025 returns filed in 2026, the IRS has indicated it will apply this waiver automatically in some cases, but partnerships should not rely on that and should be ready to request it.
Reasonable Cause
When neither of the first two routes works, the remaining option is a general reasonable cause defense. The standard: the partnership exercised ordinary business care and prudence to meet the filing obligation and still failed.2Office of the Law Revision Counsel. 26 USC 6698 – Failure to File Partnership Return The IRS evaluates each case on its facts.
Arguments that tend to succeed involve circumstances genuinely outside the partnership’s control:
- Destruction of records by fire, flood, or other disaster.
- Serious illness, hospitalization, or death of the partner who handled the partnership’s finances, with no one else able to step in.
- Reliance on a tax professional the partnership selected carefully, gave complete information, and reasonably believed was filing the return.
The reliance-on-a-professional argument is the most commonly attempted and the most commonly bungled. The IRS does not accept “our accountant dropped the ball” on its own. The partnership has to show it picked someone qualified, handed over everything the preparer needed, and had no reason to suspect the return was going unfiled. Ignored requests for documents or weeks of silence toward the preparer sink the argument.
How to Respond to a CP162 Notice
The IRS typically opens the conversation with a CP162A or CP162B notice. How to respond depends on which relief route fits.
For the small partnership exception, a written response to the notice referencing Revenue Procedure 84-35 is usually enough.7Internal Revenue Service. Understanding Your CP162A Notice Confirm each of the four conditions and note that all partners timely reported their shares.
For First-Time Abatement, call the number on the notice and ask for FTA, or make the request in writing. No special form. A clear statement that the partnership qualifies under the FTA waiver based on its clean three-year history is the whole request.
For reasonable cause, use Form 843.8Internal Revenue Service. About Form 843, Claim for Refund and Request for Abatement Reference the tax period and the CP162 notice number. Build a detailed narrative with specific dates and supporting documents: medical records, insurance claims, correspondence with the preparer. Vague assertions that the partnership “tried its best” get nowhere.
Review can take months. Collection activity may continue during that time unless the partnership has written confirmation of a hold. If the request is denied, the partnership can appeal through the IRS Office of Appeals, or pay the penalty and pursue a refund claim in federal court.
Never Filed at All Is the Worst Position
For returns that were filed late, the IRS generally has three years from the filing date to assess the penalty. When no return was ever filed, no statute of limitations runs.9Internal Revenue Service. Procedures for Assessing IRC 6698 and IRC 6699 Penalties The IRS can come back years later and assess the full twelve-month maximum for any year that went unfiled. Filing a late return, even one years overdue, at least starts that clock and locks the penalty at the twelve-month cap regardless of how long the delay has been.