November 20/27, 2017: Volume 32, Issue 12
By Roman Basi
A client recently asked me if it was necessary to file IRS form 1065 for people who operate as a “small partnership.” This is a question you might be asking yourself if you are one of the many people in this country who operate your business as a partnership. The answer is yes, no and maybe.
A simple understanding as to what the IRS wants comes in a report of some form or another that the IRS approved. Regardless, the fact is you must file taxes every year as either a partnership or an individual. If the deadline cannot be met, you can apply for an extension under certain circumstances, which includes being unprepared to immediately pay taxes. With regards to partnerships, it is your size (the amount of partners in the business) that determines the type of report to be filed and whether you will be subject to penalties and interest if you fail to file that report on time. Whether it’s in the form of personal income (schedule C) or a 1065, the IRS writes the rules and punishes those who fail to comply with such rules. However, to help comply with IRS rules the IRS has provided Revenue Procedure 84-35. (Oftentimes, the intricacies of the tax code are buried deep within various IRS manuals.) Created by the IRS in 1984, Revenue Procedure 84-35 contains a reasonable cause exception that a small partnership can employ to avoid the tax penalties levied for failure to file a partnership return. However, when making use of this procedure, it is extremely important to understand the factors that qualify an entity as a small partnership.
Second, it’s vital to consult a professional who understands the case law that interprets the parameters of how to properly employ the procedure. Take, for example, the confusion that exists surrounding small partnership and tax filing requirements. An exemption exists under 26 U.S. Code §6698(a), which can be summarized by stating that the mandatory penalties associated when a partnership fails in a requirement provides that, except for willfulness, if a partnership is required to file a return under Code Sec. 6031, yet fails to file on time including extensions, the partnership is liable to severe penalties unless the failure is due to “reasonable cause.”
Clearly an exception for reasonable cause exists; however, the question becomes what is a reasonable cause? To answer that question, you must have someone equipped to understand the accounting aspects, corporate structures and legal knowledge to interpret the law and ensure tax preparation perfection.
Do you know the ins and outs of your corporate structure? Are you equipped to interpret case law that dictates the meaning of IRS statutes? If the answer to these questions is no, it’s highly likely a competent tax professional could improve your businesses in a number of ways.
Additional analysis is often required to determine the relief afforded under such exceptions. For instance, Part 20 of the IRS Manual contains a set-aside for penalties and interest. There we find the full definition and more insight as to the question of relief under reasonable cause. IRM 22.214.171.124.3.1 lays out the full parameters of Rev. Proc. 84-35, but also provides guidance in regard to 6231(a)(1)(B), which exempts certain small partnerships from the penalties for failure to file; however, they are not automatically exempted from having to file. These exemptions are important to be aware of and could help you avoid costly penalties.
Roman Basi is an attorney and CPA with the firm Basi, Basi & Associates at The Center for Financial, Legal & Tax Planning. Be sure to attend his presentation on Tuesday, Jan. 30 at TISE, where he will discuss different ways retailers can reduce their taxes while protecting their assets.