A free guide from Deanna R. Ngueket, CPA, LLC
If you run a partnership or an S corporation here in Houston, Humble, or Atascocita, September 15 was your day. That was the extended due date for the 2025 Form 1065 and Form 1120-S. If the return did not go out yesterday, you are probably telling yourself the same thing I hear every year at this time: the business didn’t owe any tax, so how bad can it be?
Here is the honest answer. The penalty for filing a partnership or S corporation return late has nothing to do with how much tax the business owes. It is charged per owner, per month, whether the return shows a profit, a loss, or zero. A two-partner LLC that owes the IRS nothing at all and files a month late is looking at $510. The same LLC that never files is looking at $6,120. And there is a second piece of news that almost nobody has caught up with yet: as of this summer, the IRS changed how relief from that penalty gets applied, and for the return you are filing right now, it may be applied without you ever asking. Let me walk you through all of it.
The penalty is per owner, per month — and tax due has nothing to do with it
Two sections of the tax code do the work here. Section 6698 covers partnerships. Section 6699 covers S corporations. They read almost identically, and they work the same way.
The penalty is a flat dollar amount multiplied by two things: the number of owners, and the number of months the return is late. For returns required to be filed after December 31, 2025 — which includes every 2025 partnership and S corporation return, whether it was due in March or extended to September 15 — that amount is $255 per owner, per month (IRS, Failure to File Penalty; the figure comes from the annual inflation adjustment in Rev. Proc. 2024-40, made under section 6698(e)).
Four details inside that sentence decide almost every case I see:
It does not matter that you owe nothing. Section 6698 penalizes the failure to file the return. It is not a percentage of tax. A partnership with a $40,000 loss and a partnership with $400,000 of income pay the same late-filing penalty.
A part of a month counts as a whole month. File four days late and you are charged for a full month. File one day into the second month and you are charged for two.
The owner count is everyone who was an owner at any time during the year. The IRS counts “the number of persons who were partners in the partnership at any time during the taxable year,” not the number of partners on the day you file. If a partner left in April, he still counts.
It stops at twelve months. That is the cap, and it is the only mercy in the provision. Twelve months times $255 is $3,060 per owner — so $6,120 for a two-owner entity, $9,180 for three.
One more thing worth knowing for planning purposes: the amount is indexed and keys to the calendar year the return was required to be filed, not the tax year. Your 2026 returns, the ones due in March 2027, carry a higher adjusted figure under Rev. Proc. 2025-32. That is next spring’s problem, but it is a real one.
Scenario one: the two-member LLC in Humble that files October 20
A husband-and-wife team runs a two-member LLC taxed as a partnership. The books closed late, the preparer was buried, and the 1065 finally goes out October 20. The business lost money in 2025. Not a dollar of tax is due.
Count the months from the September 15 due date. September 16 through October 15 is month one. October 16 through October 20 is a piece of month two, and a piece counts as the whole thing. Two months.
Two months × two partners × $255 = $1,020.
Five days past a whole month cost this couple $510, because the second partial month rounded up. If the return had gone out October 14 instead, the bill would have been half that. When a return is already going to be late, the single cheapest thing you can do is understand where the next monthly line falls and get the return in before it.
Scenario two: the three-shareholder S corp with an old $180 payroll penalty
An S corporation with three shareholders files its 1120-S on December 10. Same math, one month longer: September 16 to October 15, October 16 to November 15, and a piece of the month ending December 15. Three months.
Three months × three shareholders × $255 = $2,295.
The owner calls me expecting to hear about First Time Abate, because that is what he read. So we pull the account transcripts. In 2024 the company deposited a payroll tax three days late and was charged a $180 failure-to-deposit penalty. Small. Paid immediately. Forgotten.
That $180 is why the $2,295 sticks. The relief we are about to discuss requires that in the prior three years either no penalty was assessed — the IRS’s threshold is one dollar or more, excluding the estimated tax penalty — or that any penalty assessed was later removed for reasonable cause or IRS error. A three-day-late payroll deposit two years ago closes the door on a $2,295 exemption today.
This is why I tell business owners that a small penalty is never really small. It is a deductible you did not know you were buying.
Scenario three: the small partnership where the penalty does not apply at all
Two individual partners, equal shares, no entities involved. They never filed the 2025 Form 1065 at all. The IRS eventually assesses the full twelve months: twelve × two × $255 = $6,120, and it arrives on a Notice CP162A.
For a partnership that fits a narrow profile, that penalty is not merely forgivable — the IRS’s own position is that it does not apply. Revenue Procedure 84-35 covers domestic partnerships with ten or fewer partners where every partner is an individual (other than a nonresident alien) or an estate, every item of income and deduction is shared in the same proportion by all partners, and every partner reported his or her share of the partnership’s income on a timely filed personal return. A married couple filing jointly counts as one partner. IRS Chief Counsel confirmed the procedure remains in effect and confirmed those conditions (CCA 201733013).
Two cautions, because this is where people get hurt:
Rev. Proc. 84-35 is relief from the penalty, not permission to skip the return. Chief Counsel said so in as many words: it “does not provide an automatic exemption to partnerships from the requirement of filing a Form 1065.” Every partner still needs a K-1, and the return still has to be filed.
And it is not automatic. The IRS’s own CP162A guidance tells small partnerships to submit a statement, signed under penalty of perjury, establishing that they meet the conditions. A phone call does not do it. In practice this is a one-page letter with the partner list, the ownership percentages, and the filing dates of each partner’s 1040, signed and mailed to the address on the notice. I write these regularly. They work when the facts are there and they fail when someone guesses at the facts.
What changed this summer: relief you may receive without asking
This is the part that is new, and it is the reason I wanted this post out the day after the deadline.
On July 8, 2026, the IRS announced Automatic Exemption from Penalty, or AEP, in IR-2026-83. Under the old system, First Time Abate existed but you had to know about it and call and ask for it. Under AEP, the IRS applies the relief itself, during processing of the original return, and sends a notice confirming it was granted. The announcement is direct about it: “Taxpayers do not need to take action to receive this relief.”
For our purposes the important questions are whether it reaches business returns and whether it reaches the return you are filing this fall. It does, on both counts.
The IRS’s internal implementing guidance lists Form 1065 and Form 1120-S among the eligible return types and lists the failure-to-file penalties under section 6698(a)(1) and section 6699(a)(1) among the penalties AEP prevents, alongside failure to pay and failure to deposit (IRS interim guidance SBSE-20-0626-0643, June 17, 2026). And AEP applies to eligible original returns beginning with tax year 2025 — the exact returns that were due yesterday.
The test is a clean three-year compliance history. In the IRS’s words, the same return type was filed for each of the prior three years — or the records show there was no requirement to file — and either no penalty of one dollar or more was assessed, excluding the estimated tax penalty, or a penalty was assessed and later removed for reasonable cause or IRS error.
That parenthetical matters more than it looks. A partnership formed in 2024 that filed its first return on time has no 2022 or 2023 filing requirement to fail. Newer entities are not shut out.
A few boundaries I want to be clear about. AEP prevents failure-to-file, failure-to-pay, and failure-to-deposit penalties; it does not cover accuracy-related or information return penalties. It does not forgive tax or interest. First Time Abate has not vanished — it remains available for 2024 and earlier returns, and there you still have to ask. And AEP fully replaces First Time Abate for returns with original due dates on or after January 1, 2027.
So for a 2025 partnership or S corporation return going in late this month with a clean three-year record behind it, the realistic expectation is that the penalty is exempted during processing and you receive a notice telling you so. That is a genuinely better system than the one it replaced. It is also applied at processing rather than on request, which means nobody calls to ask you which year you would rather spend it on. If you have two late years sitting in a drawer, the order you file them in is now a decision worth thinking about before you mail anything.
Scenario four: the Atascocita partnership that filed on paper
A four-partner construction partnership files its 1065 on time — on paper, in an envelope, the way it has always done it. Months later a CP162A shows up anyway.
The reason is the electronic filing rule. Since 2024, a partnership must file Form 1065 and its related forms and schedules electronically if it files ten or more returns of any type during the year, counting information returns, income tax returns, employment tax returns, and excise tax returns together (2025 Instructions for Form 1065). Eight W-2s, three 1099-NECs, four Forms 941, and a Form 940 is sixteen returns. That partnership crossed the line without anyone mentioning it.
The IRS issues CP162A both when a return was late and when a business “didn’t file your return electronically, as required.” Most owners I meet have no idea the aggregate count applies to them, because the old rule they remember was about having more than 100 partners. That rule still exists. The ten-return rule sits underneath it and catches ordinary small businesses.
What to do this week if your return is not in
Get the return filed. The penalty runs by the month, and every month you sit on it costs $255 per owner. Nothing else on this list matters as much as that.
Look at your last three years before you decide the penalty is permanent. Pull the account transcripts, not your memory. The question is not whether you feel compliant; it is whether the IRS’s records show a penalty of a dollar or more.
If you are a small partnership with individual partners who all filed on time, put the Rev. Proc. 84-35 statement together properly the first time. Signed under penalty of perjury, with the facts laid out.
And if the return covers more than one late year, stop and think before mailing. The sequence matters now in a way it did not a year ago.
Ready to get a late 1065 or 1120-S filed and the penalty handled correctly? Call (713) 730-9792 or get in touch. You can also read more about how our IRS Notice Resolution and Representation service works.
General information current as of September 2026, not advice for your situation. Whether any provision described here applies to you, and what it produces if it does, depends on facts this article cannot know. Deanna R. Ngueket, CPA, LLC – certified public accountant licensed in the State of Texas.
