What triggers the penalty
IRC 6698(a) applies when a partnership required to file under IRC 6031 either files late (paragraph (1)) or files a return that leaves out required information (paragraph (2)). It applies whether or not the partnership owes any tax. A Form 1066 filed by a REMIC is treated the same way, because IRC 860F(e) treats a REMIC as a partnership for filing and penalty purposes.
The due date for a domestic partnership is the 15th day of the 3rd month after the tax year ends (March 15 for a calendar year), moved to the next business day when it falls on a weekend or legal holiday; the 2025 Instructions for Form 1065 note that calendar-year partnerships could timely file their 2025 returns by March 16, 2026. Form 7004 gives an automatic extension, which the Form 7004 instructions describe as generally 6 months, if it is filed by the regular due date. The penalty runs from the due date including extensions.
An incomplete return is penalized under the same section. IRC 6031 requires the return to include the information prescribed by forms and regulations, and the IRS codes incomplete returns by what is missing: Schedules K-1, Schedule L, Schedule K, and missing K-1 TINs (five or more) all have their own missing schedule codes in IRM 20.1.2.4.4.1. One limit is worth knowing: the IRM states that “A penalty cannot be asserted under IRC 6698 for failure to attach required statements to Schedules K-1 sent to partners.”
When a return is both late and incomplete, the IRS charges one penalty, not two. The IRM rule is that “The incomplete return penalty takes precedence unless the return is 12 months or more late.”
How the penalty is computed
The penalty for each month (or part of a month) is the base rate multiplied by the number of persons who were partners at any time during the tax year, for up to 12 months. “Month” has the same meaning as for the IRC 6651(a)(1) failure-to-file addition. The base rate is inflation-adjusted and keyed to the year the return is due, without regard to extensions:
| Return due (without extensions) | Base rate per partner per month | Source |
|---|---|---|
| 2023 | $220 | IRM 20.1.2.4.2 |
| 2024 | $235 | IRM 20.1.2.4.2 |
| 2025 | $245 | IRM 20.1.2.4.2 |
| 2026 | $255 | Rev. Proc. 2024-40, sec. 2.56; IRM 20.1.2.4.2 |
| 2027 | $260 | Rev. Proc. 2025-32, sec. 4.55; IRM 20.1.2.4.2 |
Rev. Proc. 2024-40 states the amount for “any return required to be filed in 2026”, so a calendar 2025 Form 1065 (due in March 2026) uses $255 even if it was extended and filed later. A calendar 2026 return, due in 2027, uses $260 under Rev. Proc. 2025-32.
| Example (2025 calendar-year Form 1065, due 2026) | Partners | Months | Penalty |
|---|---|---|---|
| Filed two weeks after the extended due date | 3 | 1 | 3 x 1 x $255 = $765 |
| No extension; filed in early July 2026 | 4 | 4 | 4 x 4 x $255 = $4,080 |
| Never extended; filed more than a year late | 12 | 12 (cap) | 12 x 12 x $255 = $36,720 |
The partner count drives the number. IRC 6698(b)(2) counts “the number of persons who were partners in the partnership during any part of the taxable year”, so a partner who sold out in February still counts. If the IRS used the wrong number, the IRM directs employees to “verify the number of partners claimed and adjust the penalty accordingly.” The late partnership and S corporation penalty calculator runs the arithmetic for any due year.
How the IRS assesses and collects it
Since processing year 2022, a complete but late return generates the penalty systemically as TC 246 with penalty reference number (PRN) 722, and an incomplete return as TC 246 with PRN 723. Manual assessments post as TC 240 with the same PRNs, and the IRM records the partner count (item reference number 851) and months late (IRN 852) with the assessment so the notice can show the computation that IRC 6751(a) requires. On an account transcript, those codes tell you which of the two penalties you are dealing with.
There is no 30-day letter or notice of deficiency first. The IRM is explicit: “Assessment of the penalty under IRC 6698 does not follow deficiency procedures, and the taxpayer does not have any pre-assessment appeal rights.” Any dispute therefore happens after assessment, through an abatement request and, if that is denied, an appeal (see appealing a penalty abatement denial).
The partnership is the assessed taxpayer, but the partners are not insulated. IRM 20.1.2.4 notes that “for the purpose of enforced collection action the partners or investors are held individually liable for the penalty to the extent of their liability for debts of the partnership or REMIC.”
Relief routes, in the order the IRS applies them
IRM 20.1.1.3 has the IRS consider relief in a fixed order: correction of IRS error, statutory and regulatory exceptions, administrative waivers, and then reasonable cause. For the 6698 penalty that produces these options.
1. IRS error and account corrections
If the return was in fact timely (an extension that did not post, a timely mailed return with proof of mailing), the fix is an account correction, not penalty relief. If the penalty was charged for a schedule the partnership was not required to file, the IRM says to abate it with penalty reason code 045, IRS error. If an amended return reports a different number of partners than the original, the penalty has to be adjusted manually.
2. Entities outside the penalty
Two groups are carved out in the IRM. A bank common trust fund that uses Form 1065 to meet its IRC 6032 filing requirement is not subject to IRC 6698, and partnerships under a monthly closing election in Rev. Proc. 2003-84 are generally not required to file a full Form 1065 after the first year (the first-year abbreviated return can still be penalized if late).
3. First Time Abate, and the new automatic version
First Time Abate covers the late filing penalty under IRC 6698(a)(1) but not the incomplete return penalty. IRM 20.1.2.4.3 states it plainly: “First Time Abate does not apply to IRC 6698(a)(2)penalties.” The partnership must have filed the same return for the prior three years, with no unreversed penalties (other than an estimated tax penalty) and no penalty removed under FTA in that look-back period. See the First Time Abate guide and the eligibility checker.
The IRS has announced that FTA is transitioning to an Automatic Exemption from Penalty (AEP) starting in summer 2026. According to the IRS penalty relief page, Form 1065 is an eligible return, the late filing penalty under IRC 6698(a)(1) is an eligible penalty, and AEP applies to 2025 tax year returns and later: if the partnership has a three-year history of timely compliance, the penalty is not assessed at all when the original return processes, and the IRS sends a letter saying so. For 2024 and earlier years, FTA still has to be requested.
4. Rev. Proc. 84-35 for small partnerships
A domestic partnership with 10 or fewer partners that meets the conditions in Rev. Proc. 84-35 is treated as having reasonable cause, provided each partner fully reported its share of income, deductions and credits on a timely filed return. The conditions (individual or estate partners only, same-share allocations, timely partner returns) are strict, and the IRS can reassess if any of them later turns out not to be met. The full analysis is on the Rev. Proc. 84-35 page.
5. Reasonable cause
Ordinary reasonable cause under IRM 20.1.1.3.2 is available for both the late and the incomplete return penalty: death or serious illness of the person responsible, fire or casualty, inability to obtain records, and the other circumstances described in the reasonable cause guide. Two IRM points narrow it for this penalty. First, “Reasonable cause is not demonstrated, and cannot be presumed, as long as the failure continues for which the partnership is being penalized.” Second, the explanation has to account for the whole period of delay, because the IRS weighs how quickly compliance followed once the obstacle ended.
Watch the interaction between the two penalties. If the incomplete return penalty (PRN 723) is abated, the IRM instructs employees to assess the late filing penalty (PRN 722) instead unless the partnership had reasonable cause for filing late. The one exception: if the incomplete return penalty is abated under Rev. Proc. 84-35, the late filing penalty is not assessed.
Responding to the penalty notice
- Pull the account transcript and confirm the PRN (722 late, 723 incomplete), the partner count and months used, and whether an extension posted. Fix account errors first; the IRM will not consider relief until the module is correct.
- Check FTA eligibility for the late filing penalty (three prior years of timely Forms 1065, no prior FTA). For 2025 and later returns, check whether AEP should have applied.
- For 10 or fewer partners, test each Rev. Proc. 84-35 condition and confirm every partner filed on time and reported the partnership items.
- If neither applies, document reasonable cause with dates that line up with the delay. Do not attach the explanation to the return itself; the Form 1065 instructions say “Don’t attach an explanation when filing the return.”
- Make the request by phone (the number on the notice) or in writing, or on Form 843 (line 6: IRC 6698; line 7: box c). Under IRM 20.1.1.3.1, oral requests for relief from failure-to-file penalties are considered up to a dollar threshold the public IRM does not publish; above it the IRS asks for a signed statement.
- If the request is denied, the denial letter carries appeal rights. Calendar the deadline in the letter and see appealing a penalty abatement denial.
If the penalty has already been paid, the request becomes a claim for refund and the IRC 6511 period must still be open. See refund claims for paid penalties. For drafting help, the FTA request letter and reasonable cause letter templates are built for this.
Other penalties that travel with a late 1065
| Penalty | Amount for 2026 filings | Notes |
|---|---|---|
| Failure to furnish Schedules K-1 (IRC 6722) | $340 per K-1 (2025 Form 1065 instructions) | Separate from 6698; reasonable cause under Treas. Reg. 301.6724-1, not FTA |
| Failure to file electronically, more than 100 partners (IRC 6721(a)(2)(A)) | $340 per partner over 100 for returns due in 2026 (IRM 20.1.2.5 table) | Assessed as TC 246 PRN 688; waiver if one was obtained |
| Failure to file Form 8985, the BBA partnership adjustment tracking report | Same per-partner, per-month computation (PRN 724) | IRC 6698(a) itself covers the tracking report under IRC 6226(b)(4)(A); see Forms 8985 and 8986 |
| Failure to file under IRC 6651(a)(1) on a Form 1066 reporting tax | 5% per month of the tax | A REMIC return reporting tax can draw both 6651 and 6698 |
The electronic filing requirement for partnerships with more than 100 partners has its own reasonable cause standard (undue economic hardship, IRS action, agent failure), and the IRM notes that “These criteria are NOT the same as the First Time Abate criteria”. For BBA partnerships, keep the late filing penalty separate from audit penalties under the centralized regime; see penalties under BBA.
Questions practitioners ask
Does the penalty apply if the partnership had no income or owed nothing?
Yes. The 6698 penalty is computed per partner and per month, not on tax. A zero-income partnership that files late is charged the same as a profitable one. Only the relief routes (IRS error, FTA or AEP, Rev. Proc. 84-35, reasonable cause) remove it.
Which rate applies to an extended 2025 calendar-year return filed in October 2026?
$255. Rev. Proc. 2024-40 sets the amount for returns required to be filed in 2026, and the IRM keys each rate to the year the return is due without regard to extensions. The penalty months start only after the extended due date if the extension was valid.
Can the partnership go to Appeals before the penalty is assessed?
No. IRM 20.1.2.4.4.1 states the penalty does not follow deficiency procedures and carries no pre-assessment appeal rights. The route is a post-assessment abatement request, then an Appeals request if it is denied, then a refund claim and suit if needed.
Is First Time Abate available for an incomplete return?
No. FTA covers IRC 6698(a)(1), the late filing penalty, but the IRM excludes IRC 6698(a)(2). The incomplete return penalty can be removed for reasonable cause, IRS error (a schedule that was not required), or Rev. Proc. 84-35.
We abated the incomplete return penalty. Why did a new penalty appear?
When PRN 723 is abated and the return was also late, IRM 20.1.2.4.3 tells employees to assess the late filing penalty under PRN 722 unless the partnership had reasonable cause for the late filing, or the abatement was under Rev. Proc. 84-35. Address both failures in the same request.
Are partners personally on the hook?
The assessment is against the partnership, but IRM 20.1.2.4 says partners are held individually liable for enforced collection to the extent they are liable for partnership debts. General partners of an unpaid assessment can therefore see collection activity.