The Form 1065 Late Filing Penalty: How IRC 6698 Works and How to Fight It

Most business owners assume that if a partnership owes no tax, a late return costs nothing. That assumption is wrong, and it is expensive. The IRS penalty for a late Form 1065 has nothing to do with tax owed. It is based on how many partners you had and how many months the return was late.

So a two-person LLC that made no money can still get a penalty notice with a number that makes your stomach drop. Here is how the penalty works, what it costs in the current years, and what you can do about it.

What IRC 6698 Actually Says

IRC Section 6031 requires every partnership to file an annual return. For most partnerships and multi-member LLCs taxed as partnerships, that return is Form 1065. IRC 6698 is the penalty that enforces that requirement.

Under IRC 6698(a), a partnership is liable for the penalty if it does either of two things:

• Fails to file on time. The deadline is determined with regard to any extension, so a valid extension moves the target.
• Files a return that is missing required information. A return that fails to show the information required under IRC 6031 can be penalized even if it was filed on time.

The statute also applies to a partnership adjustment tracking report required under IRC 6226(b)(4)(A), which comes up in centralized partnership audits. That is a separate topic, but the same penalty engine drives it.

The penalty does not apply if the partnership shows the failure was due to reasonable cause. Keep that phrase in mind. It is the door you will be trying to open later.

How the Penalty Is Calculated

The formula in IRC 6698(b) is simple and unforgiving. For each month (or fraction of a month) the failure continues, the penalty equals a base dollar amount multiplied by the number of persons who were partners at any time during the year. The penalty can run for a maximum of 12 months.

Notice two details. First, "fraction of a month" means one day late counts as a full month. Second, the partner count includes anyone who was a partner during any part of the taxable year, not just the partners on December 31.

The statute's base amount is $195, but IRC 6698(e) adjusts it for inflation for returns required to be filed after 2014. The IRS publishes the adjusted figure each year in a revenue procedure.

Returns required to be filed in	Base amount per partner, per month	Source
2025	$245	Rev. Proc. 2023-34, section 3.56
2026	$255	Rev. Proc. 2024-40, section 2.56
2027	$260	Rev. Proc. 2025-32, section 4.55

IRM 20.1.2.4.2 lists the same rates by the year the return was due, determined without regard to extensions.

A Quick Example

Say a calendar-year LLC with four members files its 2025 Form 1065 (a return required to be filed in 2026) more than 11 months late. The math is $255 times 4 partners times 12 months, or $12,240. No tax was due. Nobody did anything fraudulent. The return was just late.

Now picture a partnership with 10 partners in the same spot. That is $30,600. Partner count is the multiplier that turns a nuisance into a real problem.

When the Return Is Due

Under IRC 6072(b), a calendar-year partnership return is due on or before the 15th day of March. A fiscal-year partnership files by the 15th day of the third month after its year ends.

Treas. Reg. 1.6081-2 gives partnerships an automatic six-month extension if they file Form 7004 by the original due date. No additional extension is allowed beyond that six months. If you missed the extension too, the penalty clock started on the original due date. For more on deadlines, see our guide to partnership and S corporation filing deadlines and extensions.

Late Versus Incomplete Returns

The IRS treats a late return and an incomplete return as two different failures, but it will not stack them. According to IRM 20.1.2.4.1, if a return is both late and incomplete, the IRS does not assess two penalties. The incomplete return penalty takes precedence unless the return is 12 months or more late.

IRC 6031 lets the IRS require whatever information it prescribes by forms and regulations, so missing schedules can trigger the incomplete return penalty. One useful limit: IRM 20.1.2.4.1.1 says the IRS cannot assert the IRC 6698 penalty for failing to attach required statements to the Schedules K-1 sent to partners. Failures involving the K-1s furnished to partners are governed by separate information return rules.

Who Pays the Penalty

IRC 6698(c) says the penalty is assessed against the partnership. That sounds like good news for the partners. It is only partly true.

IRM 20.1.2.4 states that for purposes of enforced collection, the partners are held individually liable for the penalty to the extent of their liability for the debts of the partnership. In a general partnership, that can mean you. Whether an LLC member faces the same exposure depends on the entity and state law. We cover that question in detail in our guide to owner liability for LLC and partnership tax debts.

One more procedural point. IRC 6698(d) says the deficiency procedures do not apply. The IRS does not have to send a notice of deficiency before assessing this penalty, so you will not get the usual pre-assessment Tax Court route. Your main tools are an abatement request and, if denied, an appeal.

Your Relief Options

This penalty is very often removable. The question is which path fits your facts. There are three main routes.

1. Rev. Proc. 84-35 for Small Partnerships

Under IRM 20.1.2.4.3.1, reasonable cause is presumed for certain small partnerships under Rev. Proc. 84-35. The partnership generally must have 10 or fewer partners (a married couple filing jointly counts as one), every partner must be an individual (not a nonresident alien) or a deceased partner's estate, all items must be allocated in the same proportion to each partner, and every partner must have reported his or her share of partnership income on a timely filed return.

That last condition is where many requests fail. Our full breakdown is in small partnership penalty relief under Rev. Proc. 84-35.

2. First Time Abate

IRM 20.1.1.3.3.2.1 lists the IRC 6698(a)(1) late filing penalty as eligible for First Time Abate. The partnership generally needs a clean filing history for the three preceding years with no unreversed penalties. FTA does not apply to the IRC 6698(a)(2) incomplete return penalty, according to IRM 20.1.2.4.3. See our guide to First Time Abate for entity returns.

3. Reasonable Cause

If neither of the first two fits, you argue reasonable cause under the general standard in IRM 20.1.1.3.2: the partnership exercised ordinary business care and prudence but still could not file on time. Serious illness of the person responsible, a disaster, or inability to get records can qualify. Forgetting, or blaming your accountant, generally does not.

IRM 20.1.2.4.3 adds a hard rule: reasonable cause is not demonstrated and cannot be presumed while the failure is still continuing. Translation: file the return first. Then ask for relief.

What to Do If You Already Have a Penalty Notice

1. Confirm the partner count. IRM 20.1.2.4.3 tells IRS employees to verify and adjust the penalty if it was computed with the wrong number of partners. Errors here are worth checking.
2. Confirm the months. Check the due date, whether a valid Form 7004 was filed, and the date the IRS received the return.
3. File any missing returns. If other years are still open, fix that before asking for mercy. Our guide to catching up unfiled partnership and S corp returns walks through it.
4. Pick the right relief path. Rev. Proc. 84-35, FTA, and reasonable cause have different requirements. Lead with the strongest one.
5. Put it in writing. The IRS website says you can request relief by phone in some cases or in writing on Form 843, Claim for Refund and Request for Abatement.

If the IRS denies the request, that is not necessarily the end. A denial can be appealed, and a well-documented request often reads very differently to a second set of eyes. For broader background on how the IRS handles penalty relief, see our firm's penalty abatement overview.

The Bottom Line

The Form 1065 penalty punishes paperwork, not profit. It grows with every partner and every month, and it shows up whether or not anyone owed a dime of tax.

The good news is that the IRS has built several doors out of it. You just have to walk through the right one, with the return filed and the facts lined up.

If your partnership has received a penalty notice, call the Law Offices of Darrin T. Mish, P.A. in Tampa, Florida at 813-229-7100. A late return is a problem. An ignored penalty is a bigger one.