Penalties

To help ensure that returns are filed correctly and on time, the law provides penalties for failure to do so.

Failure to file. A penalty is assessed against any partnership that must file a partnership return and fails to file on time, including extensions, or fails to file a return with all the information required. The penalty is $50 times the total number of partners in the partnership during any part of the tax year for each month (or part of a month) the return is late or incomplete, up to 5 months.

The penalty will not be imposed if the partnership can show reasonable cause for its failure to file a complete or timely return. Certain small partnerships (with 10 or fewer partners) meet this reasonable cause test if:

1. All partners are individuals (other than nonresident aliens), estates, or C corporations,
2. All partners have timely filed income tax returns fully reporting their shares of the partnership's income, deductions, and credits, and
3. The partnership has not elected to be subject to the rules for consolidated audit proceedings (explained later under Partner's Income or Loss, in the discussion under Reporting Distributive Share).

The failure to file penalty is assessed against the partnership. However, each partner is individually liable for the penalty to the extent the partner is liable for partnership debts in general.

If the partnership wants to contest the penalty, it must pay the penalty and sue for refund in a U.S. District Court or the U.S. Court of Federal Claims.

Failure to furnish copies to the partners. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners. A penalty for each statement not furnished will be assessed against the partnership unless the failure to do so is due to reasonable cause and not willful neglect.

Trust fund recovery penalty. A person responsible for withholding, accounting for, or depositing or paying withholding taxes who willfully fails to do so can be held liable for a penalty equal to the tax not paid.

"Willfully" in this case means voluntarily, consciously, and intentionally. Paying other expenses of the business instead of the taxes due is considered willful behavior.

A responsible person can be a partner, an employee of the partnership, or an accountant. This may also include someone who signs checks for the partnership or otherwise has authority to cause the spending of partnership funds.

Other penalties. Criminal penalties can be imposed for willful failure to file, tax evasion, or making a false statement.

Other penalties can be imposed for the following actions.

• Not supplying a taxpayer identification number.
• Not furnishing information returns.
• Underpaying tax due to a valuation misstatement.
• Not furnishing information on tax shelters.
• Promoting abusive tax shelters.

However, certain penalties may not be imposed if there is reasonable cause for noncompliance.

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