Accounting Question

ICW #5 – IRS Response Letter

Important Note: Please use the accompanying IRS Tax Notice (located In the ICW #5 Module) as the notice to which you will write your response letter.

You are a staff accountant for a local CPA firm, Meyers and Meyers, LLP. One of your clients,

Paula Evans contacted you in February of 2022 about a new partnership she formed with four

others. The partnership, Wildwood Acres Partnership, was started in the middle of 2020 and

reports on a calendar year basis (the tax year ends on December 31). Unfortunately, this was

a little late since the 2014 partnership return was due on April 15, 2021.

Paula provided the information and your office promptly prepared the return in late February,

2022. The transmittal letter to Paula included a paragraph warning her that the IRS would

probably assess penalties for late filing. Penalties for partnerships that file late are $195 per

partner, per month (or any part thereof).

On March 29, 2022, Paula called and said she received a late filing penalty notice assessing

$10,725. She faxed the notice to you for review. Based on your review, the assessed amount is

correct.

Facts regarding the partnership:

1. All five partners are individuals and US citizens.

2. All five partners timely filed their 2020 individual income tax returns in September 2021

and included their share of partnership taxable income.

3. All five partners are equal owners of the partnership

Paula wants you to respond to the IRS notice and request relief from the penalty.

Rev. Proc. 84-35, 1984-1 CB 509, IRC Sec(s). 6031; 6231; 6698
Headnote:
Rev. Proc. 84-35, 1984-1 CB 509 (Also Part I, Sections 6031, 6231, 6698; 1.6031-1.)
Reference(s): Code Sec. 6031; ; Code Sec. 6231; ; Code Sec. 6698;
Full Text:
1. PURPOSE
The purpose of this revenue procedure is to update Rev. Proc. 81-11, 1981-1 C.B. 651, to conform to the
small partnership provisions of section 6231(a)(1)(B) of the Internal Revenue Code. Rev. Proc. 81-11 sets
forth the procedures under which partnerships with 10 or fewer partners will not be subject to the penalty
imposed by section 6698 for failure to file a partnership return.
2. BACKGROUND
.01. Section 6031(a) of the Code provides that every partnership must make a return for each
taxable year including all information that the Secretary may by forms and regulations prescribe.
.02. Section 402 of the Tax Equity and Fiscal Responsibility Act of 1982, 1982-2 C.B. 462, 585, added
sections 6221 through 6232 to the Code to provide that the tax treatment of partnership items must be
determined at the partnership level. For purposes of these sections, section 6231(a)(1)(A) defines
“partnership” to mean any partnership required to file a return under section 6031(a) except as provided in
section 6231(a)(1)(B).
.03. Section 6231(a)(1)(B) of the Code provides an exception to the definition of “partnership” for small
partnerships. In general, the term “partnership” does not include a partnership if the partnership has 10 or
fewer partners, each of whom is a natural person (other than a nonresident alien) or an estate, and each
partner’s share of each partnership item is the same as such partner’s share of every other item. A husband
and wife, and their estates, are treated as one partner for this purpose.
.04. Section 6698 of the Code imposes a penalty if any partnership required to file a return under section
6031 fails to file a timely return, or files a return that fails to show the information required by that section,
unless the failure is due to reasonable cause.
.05. The Conference Committee Report concerning section 6698 of the Code states:
The penalty will not be imposed if the partnership can show reasonable cause for failure to file a complete or
timely return. Smaller partnerships (those with 10 or fewer partners) will not be subject to the penalty under
this reasonable cause test so long as each partner fully reports his share of the income, deductions, and
credits of the partnership.
H.R. Rep No. 95-1800 (Conf. Report), 95th Cong., 2d Sess. 221 (1978), 1978-3 C.B. (Vol. 1) 521, 555. See
also H.R. Rep. No. 95-1445, 95th Cong., 2d Sess. 75 (1978), 1978-3 C.B. (Vol. 1) 181, 249, and S. Rep.
No. 95-1263, 95th Cong., 2d Sess. 106 (1978), 1978-3 C.B. (Vol. 1) 315, 403, which contain similar
statements.
3. REQUIRED PROCEDURES
.01. A domestic partnership composed of 10 or fewer partners and coming within the exceptions outlined in
section 6231(a)(1)(B) of the Code will be considered to have met the reasonable cause test and will not be
subject to the penalty imposed by section 6698 for the failure to file a complete or timely partnership return,
provided that the partnership, or any of the partners, establishes, if so requested by the Internal Revenue
Service, that all partners have fully reported their shares of the income, deductions, and credits of the
partnership on their timely filed income tax returns.
.02. Partnerships having a trust or corporation as a partner, tier partnerships, and partnerships where each
partner’s interest in the capital and profits are not owned in the same proportion, or where all items of
income, deductions, and credits are not allocated in proportion to the prorata interests, do not come within
the exception provisions of section 6231(a)(1)(B) of the Code and, are subject to the penalty imposed by
section 6698.
.03. Although a partnership of 10 or fewer partners may not be automatically excepted from the penalty
imposed by section 6698 of the Code under section 3.01, the partnership may show other reasonable
cause for failure to file a complete or timely partnership return.
.04. In determining whether a partner has fully reported the partner’s share of the income, deductions, and
credits of the partnership, for purposes of section 3.01, all the relevant facts and circumstances will be taken
into account. In making this determination, the nature and materiality of any error or omission will be
considered. For example, although an isolated clerical error normally reflects no more than mere
inadvertence, such an error may be of such magnitude that the partner will not be considered to have fully
reported. If the error or omission results in a de minimis understatement of the net amount payable with
respect to any income tax, the penalty will not be asserted. However, if the error or omission results in a
material understatement of the net amount payable with respect to any income tax, the partner generally
will not be considered to have fully reported and the penalty will be applied.
4. EFFECT ON OTHER REVENUE PROCEDURES
Rev. Proc. 81-11 is modified and superseded.
5. EFFECTIVE DATE
This revenue procedure is effective for returns required to be filed after June 22, 1984.
© 2014 Thomson Reuters/Tax & Accounting. All Rights Reserved.
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Notice Number: GP 162
Date: March 20, 2022
Taxpayer Identification Number:
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Wildwood Acres Partnership
1664 Evans Street, Suite 1400
San Diego, California 92101
111,t1 1
36-4448551
Tax Form: 1065
TaxPerlodt December 31, 2020
0032:H
We Charged a Penalty on Your Partnership Tax Return
Why You are Getting Tbis Notice
We charged a penalty Lmder Internal Revenue Code Section 6698 (a) (1) because. according to our
records, you filed your partnership return late.
How We Calculated the Amount You Owe
The penalty is $195 for each person who was a partner at any time during the tax year, for each month or
part of a month the return was late, for up to 12 months.
Number of Partners
5
Late Filing Penalty
Total Penalty ··
$10,725.00
$10,725.00
Less Penalty Paid
$.00
Total Amount You Owe
$10,725.00
Subtract Payments We Have Not Included
$’–_____
Pay the Adjusted Amount Due
$:,..________
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