The Form 1120-S Late Filing Penalty: What IRC 6699 Costs Your S Corporation

Here is the misconception that costs S corporation owners real money: "The S corp doesn't pay tax, so if the return is late, who cares?" The IRS cares. And it has a penalty built for exactly that situation.

The penalty for filing Form 1120-S late is not a percentage of tax owed. It is a flat charge per shareholder, per month. It applies even if the company lost money. Here is how it works and what you can do about it.

The Rule: IRC 6699

IRC Section 6037 requires every S corporation to file an annual return. That return is Form 1120-S. IRC 6699 is the penalty that enforces the filing requirement.

Under IRC 6699(a), an S corporation is liable for the penalty if it:

• Fails to file the return on time, determined with regard to any extension of time for filing, or
• Files a return that fails to show the information required under IRC 6037.

The penalty does not apply if the S corporation shows the failure was due to reasonable cause. That exception is your main defense, and we will come back to it.

IRC 6699 was added to the Code in 2007. According to IRM 20.1.2.6.2, there was no penalty for S corporation returns due before December 21, 2007. If you have an old-timer telling you "the IRS never penalized late S corp returns," that was true once. It has not been true for a long time.

How the Penalty Is Calculated

IRC 6699(b) uses a simple formula. For each month (or fraction of a month) the failure continues, the penalty is a base dollar amount times the number of persons who were shareholders at any time during the taxable year. The penalty runs for a maximum of 12 months.

A return filed one day late is charged a full month. A shareholder who sold out in February still counts for the year.

The statutory base is $195, adjusted for inflation under IRC 6699(e) for returns required to be filed after 2014. The adjusted amounts come from the IRS's annual revenue procedures:

Returns required to be filed in	Base amount per shareholder, per month	Source
2025	$245	Rev. Proc. 2023-34, section 3.57
2026	$255	Rev. Proc. 2024-40, section 2.57
2027	$260	Rev. Proc. 2025-32, section 4.56

IRM 20.1.2.6.2 lists the same base rates, keyed to the year the return was due without regard to extensions.

Example

A calendar-year S corporation with three shareholders files its 2025 Form 1120-S, a return required to be filed in 2026, a year late. The penalty is $255 times 3 shareholders times 12 months, or $9,180. A one-shareholder S corp in the same position faces $3,060. Small company, real money.

When Form 1120-S Is Due

IRC 6072(b) sets the due date for S corporation returns at the 15th day of March for calendar-year companies, or the 15th day of the third month after a fiscal year ends.

Treas. Reg. 1.6081-3 provides an automatic six-month extension if the corporation files Form 7004 by the original due date. The extension extends the time to file. It does not extend the time to pay any tax due. If no extension was filed, the penalty clock starts at the original March deadline. Our guide to partnership and S corporation filing deadlines covers the details.

Late Returns, Incomplete Returns, and One Penalty

A Form 1120-S can be penalized for being late or for being incomplete. IRM 20.1.2.6.1 says that 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.

IRM 20.1.2.6.1.1 also notes that the IRS cannot assert the IRC 6699 penalty for failing to attach required statements to the Schedules K-1 sent to shareholders.

The penalty is assessed against the S corporation itself under IRC 6699(c). And IRC 6699(d) provides that deficiency procedures do not apply, so the IRS can assess it without first issuing a notice of deficiency.

The Special Trap: Short Termination Years

When an S election terminates mid-year, the corporation has to file two short-year returns: one as an S corporation and one as a C corporation. Under IRC 1362(e)(6)(B), the S short-year return is due at the same time as the C short-year return, including extensions.

IRM 20.1.2.6.3.1 tells IRS employees to recompute the penalty based on the correct due date for these short termination year returns and to abate any erroneous or excess penalty. If your S election ended unexpectedly, check the penalty math carefully. For more on how elections end without anyone intending it, see our article on inadvertent S corporation terminations.

Relief Options for S Corporations

No Rev. Proc. 84-35

Let's clear this up first. Partnerships with 10 or fewer partners can sometimes get presumed reasonable cause under Rev. Proc. 84-35. S corporations cannot. IRM 20.1.2.6.3 says it directly: penalty relief under Rev. Proc. 84-35 does not apply to S corporations. If someone tells you otherwise, they are thinking of partnerships.

First Time Abate

IRM 20.1.1.3.3.2.1 lists the IRC 6699(a)(1) late filing penalty as eligible for First Time Abate. The S corporation generally needs to have filed the same return for the three preceding years with no unreversed penalties in those years.

Two cautions from the same IRM section. First, FTA does not apply to the IRC 6699(a)(2) penalty for an incomplete return. Second, for business accounts, FTA criteria are not met if the three-year look-back shows a Form 1120 or Form 1120-S was filed late but not penalized. A "free pass" in an earlier year can still count against you. Our full guide to First Time Abate for entity returns walks through the look-back.

Reasonable Cause

If FTA is not available, the corporation must show reasonable cause. Under IRM 20.1.1.3.2, that means the business exercised ordinary business care and prudence but still could not file on time. For a corporation, IRM 20.1.1.3.2.2.1 recognizes death, serious illness, or unavoidable absence of the responsible person, but it focuses on whether that person had sole authority to file the return. If someone else could have filed, the IRS will ask why they did not.

See our guide to reasonable cause for late entity returns for what tends to work and what does not.

Check the Shareholder Count

Because the penalty multiplies by shareholders, an error in the count is an error in the penalty. IRM 20.1.2.6.3 directs IRS employees to reduce the penalty when it was computed using an incorrect number of shareholders. IRM 20.1.2.6.1 also notes the penalty must be manually adjusted when an amended return reports a different number of shareholders than the original.

Before you argue anything else, make sure the IRS is multiplying by the right number.

The same goes for the month count. Confirm the original due date, whether a Form 7004 was filed on time, and the date the IRS actually received the return. If a valid extension was in place, the penalty should be measured from the extended due date, not from March. A mistake on any one of these inputs flows straight through to the bill.

A Practical Game Plan

1. File every missing Form 1120-S. Reasonable cause cannot be established while the failure continues. Our guide to catching up unfiled entity returns explains the order of operations.
2. Verify the math. Check shareholders, due date, extension status, and months late.
3. Check FTA eligibility. Look at the prior three years before writing a long reasonable cause letter.
4. Request relief in writing if a phone request does not resolve it. The IRS website says written requests can be made on Form 843.
5. Appeal a denial if the facts support relief.

For general background on how penalty relief requests are evaluated, see our firm's penalty abatement page.

The Bottom Line

An S corporation can go years without paying a dollar of entity-level income tax. It cannot go a single March without filing. Miss that deadline and IRC 6699 starts counting heads.

If your S corporation is facing a late filing penalty, call the Law Offices of Darrin T. Mish, P.A. in Tampa, Florida at 813-229-7100. Pass-through status saves you tax. It does not save you from penalties.