Late Business Return Penalties and How to Seek Relief

What is the penalty for a late partnership or S corporation return?

A partnership's Form 1065 and an S corporation's Form 1120-S can incur a federal penalty based on the number of owners, even when the entity owes no income tax. For returns originally due in 2027, the rate is $260 per partner or $260 per shareholder for each month or part of a month, up to 12 months. Use the published rate for a different due year (IRS: inflation adjustment; Form 1065 instructions; Form 1120-S instructions).

Count everyone who owned an interest at any point during the tax year, including someone who sold their interest before year-end. A partial month counts as a full month. The filing penalty can apply when a return omits required information, not just when no return was sent (Form 1065 instructions; Form 1120-S instructions). Check the due year on an older notice because the per-owner amount changes with the year the return was due (IRS: inflation adjustment). Schedules K-1 furnished to owners late or incomplete can bring a separate per-schedule penalty (Form 1065 instructions; Form 1120-S instructions).

An S corporation that owes entity-level tax can also face a tax-based late-filing charge of 5% of unpaid tax per month or partial month, capped at 25% of unpaid tax and subject to the 60-day minimum shown for C corporations below. It may also owe a late-payment penalty on that tax (Form 1120-S instructions).

What does a C corporation pay for filing or paying late?

A C corporation filing Form 1120 generally has a federal late-filing charge when tax was unpaid by the original payment deadline. Paying later stops further late-payment charges and tax interest on the amount paid, but the filing charge can continue until the return is filed, subject to its cap (IRS: failure-to-file penalty; Form 1120 instructions).

When both charges apply for the same month, the IRS reduces the late-filing charge by the late-payment charge for that month; do not simply add the headline rates (IRS: failure-to-file penalty). A corporation with no tax due generally has no tax-based federal late-filing charge under this rule, but other filing duties and state charges may still matter. The separate penalty for underpaying estimated corporate tax belongs to How C corporations are taxed.

Does an extension stop the penalty?

A properly filed Form 7004 moves the filing deadline for the return it names; it does not generally move the date tax must be paid. File Form 7004 by the original return deadline and keep its acceptance record (IRS: Form 7004 instructions).

If IRS disaster relief postponed the business's deadline, the late-filing period starts only after the postponed date (IRS: Internal Revenue Manual).

The Form 7004 instructions give a limited late-payment penalty exception for a corporation whose tentative tax on Form 7004 (Part II, line 6), or tax paid by the original deadline, is at least 90% of the tax on its return, and which pays the balance by the extended deadline; interest on tax can still run (IRS: Form 7004 instructions). Check the original and extended dates for your particular return in Which returns your business files.

Which notice did I get, and what is it charging me for?

Read the form, tax period, penalty description and Internal Revenue Code section on the actual notice before choosing a relief request. CP162 currently describes required electronic filing; CP162C can also concern a late or incomplete return, a partnership tracking report or required electronic filing (IRS: CP162; IRS: CP162C).

If the return was timely filed, send proof of filing or delivery rather than arguing reasonable cause for lateness. The IRS asks for documentary evidence of a timely extension or mailing when contesting a CP162C charge (IRS: CP162C).

Can a small partnership get its late-filing penalty removed?

Some domestic partnerships can ask the IRS to presume reasonable cause under Revenue Procedure 84-35. This is relief from a federal Form 1065 penalty, not an exemption from filing Form 1065 (IRS: CP162C; IRS: Internal Revenue Manual).

The IRS lists all these conditions in its CP162C guidance. If they fit, return the notice with a statement signed under penalty of perjury saying the partnership qualifies under Revenue Procedure 84-35; retain the partners' timely filing evidence. A late individual return, corporate partner or special allocation can defeat this route. The IRS may reinstate a penalty if a material statement proves false (IRS: CP162C).

Here, nonresident alien means a noncitizen who is not a US tax resident. A noncitizen who is a US tax resident may qualify (IRS: Topic 851).

Is first-time penalty relief now automatic?

For eligible original returns covered by this page, the IRS's Automatic Exemption from Penalty can prevent an eligible filing or payment penalty from being assessed during processing. It began with some 2025 tax-year returns in summer 2026 and replaces First Time Abate for eligible original returns due in 2027 or later. An earlier return not considered during the transition may still qualify for request-based First Time Abate (IRS: procedural update; IRS: administrative relief).

The IRS's procedural update lists Forms 1065, 1120 and 1120-S, and its public summary names the S corporation late-filing penalty as covered. The original return must arrive within three years of its original due date. For each of the preceding three years, IRS records must show the same return type was filed or was not required, without a disqualifying penalty. A prior First Time Abate or Automatic Exemption generally requires three more compliant years. Automatic relief covers the listed failure-to-file and failure-to-pay penalties. Neither it nor First Time Abate covers penalties for missing required information on Form 1065 or 1120-S (IRS: procedural update; IRS: administrative relief; IRS: Internal Revenue Manual).

If a transition-year return received no automatic consideration, ask whether First Time Abate applies. For an assessed penalty on a return due in 2027 or later, ask the IRS to review whether its error prevented automatic relief. Reasonable-cause relief remains available separately (IRS: procedural update).

What counts as reasonable cause?

Reasonable cause means the business used ordinary care and prudence but still could not file or pay on time. The IRS decides from the facts, including what happened, when it happened, what the business tried and how quickly it corrected the failure (IRS: reasonable cause).

Fire, serious illness of the person authorized to act, inaccessible records and a system failure that blocked timely electronic filing can support a request if records show the event actually caused the delay. Relying on a tax preparer to file, forgetting the date, not knowing the rule or lacking funds alone generally does not. A business remains responsible for checking that its return was accepted (IRS: reasonable cause).

How do I ask the IRS to remove the penalty, and what if it says no?

First file the missing return or missing information and check the notice against the filing and payment records. Then follow the notice's response instructions, identify each penalty and tax period, state the legal basis for relief and attach evidence. The IRS may handle some requests by phone; a written statement or Form 843 can be used when needed (IRS: reasonable cause; Form 843 instructions).

Gather the notice, accepted return and extension confirmations, payment records, a list of everyone who owned the entity during the tax year, and dated records supporting the cause of delay. For small-partnership relief, also gather each partner's timely filed return evidence. On Form 843, enter the notice's Code section on line 6, check box c on line 7 for reasonable cause and explain the request on line 8; use "Other" on line 5 for Form 1065 or 1120-S. An authorized corporate officer signs a corporation's Form 843 (Form 843; IRS: CP162C).

If you paid the penalty and seek a refund, the general claim limit is three years after filing the original return or two years after payment, whichever is later (Form 843 instructions).

If the IRS cannot approve a phone request, send a written request and keep proof of delivery. If it denies that request, follow the denial letter's appeal instructions and deadline. The IRS generally allows 30 days from the letter's date, but the letter controls (IRS: penalty appeal; IRS: reasonable cause).

Is the interest removed too?

When the IRS reduces tax or a penalty, it automatically reduces the interest that was charged on the removed amount. Interest on tax that remains unpaid is different: it generally continues until payment, even after a filing extension or penalty relief (IRS: interest).

The IRS does not remove interest merely because there was reasonable cause or first-time relief. A separate interest-abatement request may be possible for an unreasonable IRS error or delay; the facts and statutory limits matter (IRS: interest; Form 843 instructions).

Does my state charge its own late penalty?

State penalties are separate from federal penalties and must be checked in each state where the business files. California can charge $18 per partner, LLC member or S corporation shareholder for each month or part of a month, up to 12 months, if the return is filed after its deadline, including any extension, or lacks required information (California FTB: partnership instructions; LLC instructions; S corporation instructions).

California does not apply federal Revenue Procedure 84-35 small-partnership relief to its partnership penalty. Its one-time timeliness penalty abatement is for qualifying individuals, not business entities; a business can instead present facts supporting reasonable cause under California's process (California FTB: partnership booklet; one-time abatement; business penalty help). An LLC's Form 568 also carries charges on unpaid annual tax and LLC fee; those are in California minimum tax and LLC fee.

Example

Illustrative US dollars for a return originally due in 2027, with no extension or relief assumed. A partnership with three partners throughout the year files its Form 1065 two months and one day after the due date. That counts as three partial or full months. At US$260 per partner per month, the federal filing penalty is 3 × 3 × US$260 = US$2,340, even if the partnership owes no federal income tax. If one partner joined late in the year, the count would still include that person. State charges, if any, would be separate.

Different for you?

• Several tax years are missing: decide what to file first in Catching up on unfiled business returns.
• The notice concerns Form 5472: use Missed foreign-owner filings and penalties.
• The S corporation election was late or never confirmed: check Late S corporation election relief.
• You are unsure which return was due: use Which returns your business files.
• California assessed a Form 568 charge or unpaid minimum tax: see California minimum tax and LLC fee.
• A corporation underpaid estimated tax: see How C corporations are taxed.
• The notice names several penalties, a large balance or a disputed owner count: gather the notice, filing proof, payment dates and owner list before seeking tax preparation help.