IRS Form 1065 (U.S. Return of Partnership Income) is an information return used to report the income, gains, losses, deductions, credits, and related items from the operation of partnerships.
Partnerships generally do not pay taxes because they are pass-through entities. Instead, profits or losses, and related items, are reported by partners (typically based upon their partnership interests) on their individual tax returns. Despite the fact that income taxes are not owed by partnerships, the form must still be filed for those required to do so, and there are various penalties that may be imposed, for various reasons, by the IRS.
This article covers the penalties that may apply for failures to comply with Form 1065 requirements. The penalties may be steep in certain circumstances, so taxpayers subject to filing Form 1065 should be aware of them.
Failure to File Penalty
A penalty will be assessed against a partnership that is required to file a partnership return if it either fails to file the return by the due date (including extensions) or if it files a return that does not report all required information, unless such failure is due to reasonable cause. If a partnership plans to demonstrate reasonable cause, it must attach an explanation to the partnership return.
The late filing penalty is $195 for each month (or part of a month) for a maximum of 12 months that the failure continues multiplied by the total number of individuals who were partners during any part of the partnership’s tax year for which the return is due.
Failure To Timely Furnish Information
A $100 penalty (for each Schedule K-1 form for which a failure occurs) may be imposed for failure to furnish a Schedule K-1 to a partner when due and for each failure to include all required information (or the inclusion of incorrect information) on a Schedule K-1. A maximum penalty of $1.5 million for all such failures during a calendar year, may be imposed.
If the requirement to report accurate information is intentionally disregarded, the penalty for each failure is increased to the greater of $250 or 10% of the aggregate amount of items required to be reported. In such cases, the $1.5 million maximum penalty does not apply.
Trust Fund Recovery Penalty
A trust fund recovery penalty for Form 1065 may be imposed on all persons who are responsible for collecting, accounting for, and paying over various trust fund taxes (including certain excise, income, social security, and Medicare taxes), and who acted willfully in failing to collect, withhold, and/or pay such taxes (the IRS may determine who is responsible for such requirements). Such taxes are typically reported on various forms, including Form 720 (Quarterly Federal Excise Tax Return), Form 941 (Employer’s Quarterly Federal Tax Return), Form 944 (Employer’s Annual Federal Tax Return), and Form 945 (Annual Return of Withheld Federal Income Tax), among others.
The trust fund recovery penalty for Form 1065 is equal to the unpaid trust fund tax.
Contact Sherayzen Law Office For Legal Help in Dealing with Form 1065 Penalties
If you are facing Form 1065 penalties or wish to find out how to properly comply with the IRS requirements to avoid such penalties, contact Sherayzen Law Office for legal help with Form 1065. Our experienced partnership tax firm will guide you through the complex web of partnership tax requirements as well as provide vigorous ethical IRS representation if necessary.