New Penalty Notice Instructions for IRS Form Series 1120 and 1065

Beginning with 2011 filings, the IRS has issued new instructions to various complex IRS forms in the1120 (relating to corporations) and 1065 (relating to partnerships) series.  The new instructions instruct taxpayers who receive a late filing or late tax payment penalty notice after they have filed their return, to then submit a written explanation on why the return or payment was late.  If the IRS determines the explanation meets the “reasonable cause criteria” or was not due to willful neglect, the penalty will be abated.

The IRS imposes an addition to tax for failure to file a Federal income tax return by the later of its due date or extended due date.  Code Sec. 6651(a)(1).  The penalty is 5% if the failure is for not more than one month, with an additional 5% for each month or fraction thereof during which the failure continues, but not in excess of 25%.  (Code Sec. 6651(a)(1), Code Sec. 6651(b)(1)).

A failure to file or pay the tax will be considered to meet the reasonable cause criteria to the extent the taxpayer satisfactorily shows that he or she exercised ordinary business care and prudence in providing for the payment of the tax liability, but was either unable to pay or would have suffered an undue hardship if the liability had been paid on the due date.  Reg. 301.6651-1(c).  Failure to file or pay the tax will be considered willful neglect if the taxpayer fails to exercise the care that a reasonable person would observe under the circumstances to see that the standards were observed, despite knowledge of the standards or rules in question.  Reg. 53.4941(a)-1(b)(4), Reg. 1.507-1(c)(5).

A taxpayer’s written explanation must be made under penalties of perjury and filed with the district director or the director of the service center with whom the return is required to be filed.

Before 2011, the IRS required taxpayers who filed their 1120 and 1065 series forms late to attach a written explanation as to why the return or payment was late.

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