TaxPlace: The Small Partnership Exception - A Possible Way to Avoid Failure to File Penalties, but Not Complexity

Every partnership (defined as a joint venture or any other unincorporated organization) that conducts a business is required to file a return for each tax year that reports the items of gross income and allowable deductions. If a partnership return is not timely filed (including extensions) or is timely filed but is inadequate, a monthly penalty is triggered that equals $195 times the number of partners during any part of the tax year for each month (or fraction thereof) for which the failure continues. However, the penalty amount is capped at 12 months.  Thus, for example, the penalty for a 15-partner partnership would be $2,925 (15 x $195) capped at $35,100.  Such an entity is also subject to rules enacted under the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982.  These rules established unified procedures for the IRS examination of partnerships, rather than a separate examination of each partner.

An exception from the penalty for failing to file a partnership return and the TEFRA audit procedures could apply for many small business partnerships and farming operations.  However, it is important to understand the scope of the exception, and what is still required of such entities even if a partnership return is not filed.  In many instances, such entities may find that simply filing a partnership return in any event is a more practical approach.    

Read the full article here on TaxPlace.