Late S corporation return penalty (IRC 6699): per-shareholder math, assessment and relief

What the penalty covers

IRC 6699 applies to S corporation returns due after December 20, 2007. The IRM describes it as a penalty on an S corporation “that fails to file a timely or complete return (Form 1120-S) as required by IRC 6037.” Like the partnership penalty, it is computed on headcount, not tax, so an S corporation with no taxable income at the entity level is still exposed.

The return is late if it is filed after the due date including extensions. An S corporation files Form 7004 for the automatic extension, which the Form 7004 instructions describe as generally 6 months. It is incomplete if it omits information required by the form or regulations; the IRS uses missing schedule codes for a missing Schedule K-1, Schedule L (balance sheet), Schedule K, and combinations of them. As with partnerships, “A penalty cannot be asserted under IRC 6699 for failure to attach required statements to Schedules K-1 sent to shareholders.”

A return that is both late and incomplete draws one penalty. The incomplete return penalty takes precedence unless the return is 12 months or more late (IRM 20.1.2.6.1).

Computing the penalty

For each month or part of a month the failure continues, up to 12, the penalty is the base rate multiplied by the number of persons who were shareholders at any time during the tax year. “Month” is measured the same way as for the IRC 6651(a)(1) failure-to-file addition. The base rate is set by the year the return is due, without regard to extensions:

A shareholder who sold all stock during the year still counts, because the statute counts everyone who was a shareholder during any part of the year. If the IRS used the wrong number (often because of a transcription problem or an amended return reporting a different count), IRM 20.1.2.6.3 provides for adjusting the penalty and abating the excess with penalty reason code 010. The late partnership and S corporation penalty calculator does the arithmetic.

When tax is also due: IRC 6651 on top

Most S corporations owe no entity-level income tax, but some do (for example, built-in gains or excess net passive income). The 2025 Instructions for Form 1120-S describe the result: for returns with no tax due, the penalty is the per-shareholder amount; “If tax is due, the penalty is the amount stated above plus 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax.” The same instructions note a minimum for a return “required to be filed in 2026 that is more than 60 days late” of the smaller of the tax due or $525. Late payment of that tax adds the IRC 6651(a)(2) penalty. The 6651 penalties are covered in the failure-to-file and failure-to-pay guides.

Assessment, notices and interest

Beginning with processing year 2022, a complete but late Form 1120-S generates the penalty systemically as TC 246 with penalty reference number 722; an incomplete return generates TC 246 with PRN 723. Manual assessments post as TC 240 with the same PRNs, along with the shareholder count (IRN 851) and months late (IRN 852), so the notice carries the name, Code section and computation that IRC 6751(a) requires.

The penalty is assessed without a notice of deficiency. IRM 20.1.2.6.4.1 states: “Assessment of the penalty under IRC 6699 does not follow deficiency procedures, and the taxpayer does not have any pre-assessment appeal rights.” The same section tells examiners to make every effort to get enough information to decide whether reasonable cause exists before they assess.

Interest on the 6699 penalty starts later than interest on a 6651 penalty. In its pre-2022 manual assessment procedure, the IRM cautions: “Interest on a late filing penalty under IRC 6699 begins on the notice date”, while interest on a late filing penalty under IRC 6651 begins on the return due date including extensions. That matches IRC 6601(e)(2)(A), which imposes interest on an assessable penalty only if it is not paid within 21 calendar days of notice and demand (10 business days if the notice is for $100,000 or more). Paying the notice promptly while an abatement request is pending stops interest; if the penalty is later abated, the paid amount can be refunded.

Relief that works and relief that does not

First Time Abate

FTA covers IRC 6699(a)(1), not (a)(2). IRM 20.1.2.6.3: “First Time Abate (FTA) does not apply to IRC 6699(a)(2) penalties.” The usual criteria apply (the same return filed for the prior three years, no unreversed penalties other than an estimated tax penalty, no penalty removed under FTA in that period), plus a business-return wrinkle: FTA fails if the three-year look-back shows a Form 1120 or Form 1120-S that “was filed late but not penalized.” An S corporation whose prior late returns slipped through without a penalty can therefore be ineligible even though its transcript looks clean. The IRS page on administrative relief lists Forms 1040, 1065 and 1120 (and the employment tax returns) as the returns eligible for the new automatic exemption; Form 1120-S is not named, so plan on requesting FTA for a late Form 1120-S unless the IRS says otherwise. Use the FTA eligibility checker and the FTA guide.

Rev. Proc. 84-35 is a partnership-only rule

Practitioners who handle both entity types sometimes cite the small partnership revenue procedure for a small S corporation. The IRM closes that door: “Penalty relief under Rev. Proc. 84-35 does NOT apply to S corporations.” The partnership analysis is on the Rev. Proc. 84-35 page.

Reasonable cause

Reasonable cause under IRM 20.1.1.3.2 is available for both penalties. The explanation must tie dates to the failure and show the corporation acted with ordinary business care and prudence, then complied promptly once the obstacle ended; see the reasonable cause guide. For an incomplete return, the IRM points out that the IRS gives the corporation a chance to fix the return first: “Taxpayers that file an incomplete Form 1120-S or Form 1065 are provided an opportunity to submit the missing information before the incomplete return penalty is assessed.” Answering that request on time is the cheapest relief there is.

The swap trap

If the incomplete return penalty is abated on a return that was also late, IRM 20.1.2.6.3 tells employees to assess the late filing penalty instead (TC 240 PRN 722), unless the corporation had reasonable cause for filing late or qualifies for FTA. A request should address both failures.

Short termination years

When an S election terminates mid-year, the corporation files two short-year returns: an S short year ending before the termination date and a C short year beginning on it. Under IRC 1362(e)(6)(B), as summarized in IRM 20.1.2.6.3.1, the due date of the S short-year return is the same as the due date of the C short-year return, including extensions. The IRM directs employees to recompute any late filing or missing information penalty on a short termination year return using that correct due date and to abate the excess. If you are handling a termination, check this before anything else, and see inadvertent S corporation terminations for the election side.

Working the case

1. Read the notice and the transcript: PRN 722 or 723, shareholder count (IRN 851), months (IRN 852). Confirm whether a Form 7004 posted.
2. Correct account errors first. A missing extension or a wrong shareholder count is fixed by correction, not relief.
3. Check FTA for the late filing penalty, including the look-back for earlier late returns that were never penalized.
4. Otherwise, build a reasonable cause statement with dates that cover the whole period of delay, for each penalty requested.
5. Request relief by phone (number on the notice), in writing, or on Form 843 (line 6: IRC 6699; line 7: box c). Pay the notice to stop interest if the client prefers; a paid penalty can still be abated and refunded within the IRC 6511 period.
6. If denied, follow the appeal rights in the denial letter (appealing a denial).

Related guides: the partnership penalty under IRC 6698, which works the same way but adds Rev. Proc. 84-35, and requesting abatement by phone, in writing or on Form 843.

Questions practitioners ask