Rev. Proc. 84-35: reasonable cause relief for small partnerships that file Form 1065 late

What the revenue procedure says

Rev. Proc. 84-35 is short. It was issued to update Rev. Proc. 81-11 after TEFRA added the small partnership exception that was then in IRC 6231(a)(1)(B), and it rests on the legislative history of IRC 6698. The Conference Committee report quoted in the procedure said smaller partnerships “will not be subject to the penalty under this reasonable cause test so long as each partner fully reports their share of the income, deductions, and credits of the partnership.”

The operative language is section 3.01. A domestic partnership of 10 or fewer partners that comes within the small partnership exception “will be considered to have met the reasonable cause test and will not be subject to the penalty imposed by section 6698”, provided the partnership or any partner establishes, if the IRS asks, that all partners fully reported their shares on timely filed returns. It is therefore a presumption of reasonable cause, not a statutory exemption from filing. The IRM makes the same point about the underlying audit exemption: it “is not an exemption from the requirement to file a timely and complete partnership return.”

The full text of Rev. Proc. 84-35 is reproduced in IRM Exhibit 20.1.2-1, which is the most convenient public copy. It applies to returns required to be filed after June 22, 1984, and covers both the late filing and the incomplete return penalty under IRC 6698.

The amount at stake is set by IRC 6698(b): a dollar amount per partner for each month or part of a month the failure continues, “but not to exceed 12 months” (IRC 6698(a)). The dollar amount is indexed: $255 for returns required to be filed in 2026 (Rev. Proc. 2024-40, section 3.56) and $260 for returns required to be filed in 2027 (Rev. Proc. 2025-32, section 3.55). A 10-partner partnership that files six months late in 2026 therefore faces $15,300 before relief. The penalty calculator applies the current figures.

The four tests, as the IRM applies them

IRM 20.1.2.4.3.1 (rev. 12-30-2025) lists the conditions under which reasonable cause will be presumed:

Parts of IRM 20.1.2.4.3.1 are redacted in the public version (shown as blocks of symbols). Do not assume what those paragraphs say; work from the four published criteria and the text of the procedure itself.

Partnerships that do not qualify

Section 3.02 of the procedure lists the structures that fall outside it: “Partnerships having a trust or corporation as a partner, tier partnerships, and partnerships where each partner's interest in the capital and profits are not owned in the same proportion”, as well as partnerships whose items are not allocated in proportion to the pro rata interests. Those partnerships are subject to the penalty unless another relief route applies.

Failing 84-35 is not the end of the analysis. Section 3.03 says a small partnership that is not automatically excepted “may show other reasonable cause”, and the IRM repeats it: “Partnerships that do not qualify for abatement of the penalty under Rev. Proc. 84-35 may still qualify for abatement of the penalty under normal reasonable cause criteria.” See the reasonable cause guide.

S corporations cannot use the procedure at all. IRM 20.1.2.6.3 states that relief under Rev. Proc. 84-35 does not apply to S corporations; see the IRC 6699 page.

What fully reported means

Section 3.04 tells the IRS to look at all the facts and circumstances, including “the nature and materiality of any error or omission.” Its examples set the line:

• An isolated clerical error normally reflects mere inadvertence, but it can be large enough that the partner is not treated as having fully reported.
• If the error produces a de minimis understatement of the net amount payable, the penalty will not be asserted.
• If the error produces a material understatement, the partner generally is not treated as having fully reported, and the penalty applies.

In practice, the weak point is test 4: one partner who extended and filed late, or filed and omitted the K-1, defeats the presumption for the whole partnership. Before citing the procedure, confirm each partner's filing date and that the partnership items appear on the return.

How 84-35 fits with FTA and AEP

IRM 20.1.1.3 considers relief in a fixed order: IRS error, statutory and regulatory exceptions, administrative waivers, and reasonable cause. Rev. Proc. 84-35 is a reasonable cause presumption, so an administrative waiver such as First Time Abate is considered first. The IRM tells employees not to slow the case down chasing 84-35 facts when FTA is available: “Do not reject a penalty abatement request to obtain additional information if the partnership qualifies for "first time" abatement of the penalty.”

That comparison is why the choice matters for a partnership that qualifies for both. FTA is applied automatically when the criteria are met (IRM 20.1.1.3.3.2.1 says taxpayers do not have to ask for it specifically), and once used it affects the next three years. A request that leads with Rev. Proc. 84-35 and documents the partner filings gives the IRS a reasonable cause basis, but the IRS still applies the relief order, so an eligible partnership may receive FTA regardless. For 2025 and later Forms 1065, the IRS's Automatic Exemption from Penalty (AEP) can prevent the late filing penalty from being assessed at all: the IRS's administrative waiver page (reviewed October 2026) says AEP “begins summer 2026,” lists Forms 1040, 1065 and 1120 among the eligible return series, applies it to “2025 tax year returns, and subsequent,” and conditions it on timely filing and payment for the three prior years. Under AEP no penalty is assessed and the partnership receives a letter saying so; a partnership that is penalized despite a clean history should ask for the exemption. See the First Time Abate guide.

Requesting relief under 84-35

1. Confirm the penalty is the IRC 6698 penalty and that the partner count on the assessment is right. The assessment notice is CP162A, which the IRS describes as charged because “your partnership or S corporation return was late or, you didn’t file your return electronically, as required”; the related CP162 is the electronic filing version. On the transcript the penalty posts as TC 240 or 246 with penalty reference number 722 (Failure to File Form 1065, 1066, or 1120S) or 723 (Missing Information on Form 1065 or 1120S) for assessments made after January 1, 2022 (Document 6209, Section 10; IRM 20.1.1.3.3.2.1(6)).
2. List every partner for the year with type (individual or estate), residency, and percentage interest in capital, profits and each class of item.
3. Confirm each partner's return was filed on time and included the partnership items. Keep transcripts or filed-return copies; the procedure requires proof only if the IRS asks, but you want it ready.
4. Write the request: name the penalty and tax period, state that the partnership meets each condition of Rev. Proc. 84-35, section 3.01, and offer to provide partner return information. Ask in the alternative for FTA or reasonable cause.
5. Send it to the address on the notice. The CP162A notice itself offers the shortest route: if the partnership meets the conditions it lists, “you may return this notice with your statement, signed under penalty of perjury, that you qualify to have the penalty removed for reasonable cause under the provisions of Rev. Proc. 84-35.” Alternatively use Form 843 (Rev. Dec. 2024): check the Penalty box at the top for “Abatement or refund of a penalty or addition to tax due to reasonable cause or other reason allowed under the law”, on line 5 check n (Other) and write Form 1065, since the form has no 1065 box, on line 6 enter IRC 6698, on line 7 check box c (“Reasonable cause or other reason allowed under the law can be shown”) and set out the four conditions on line 8. It can also be raised by phone; the IRS may ask for a written statement.
6. If the incomplete return penalty is the one abated, confirm the IRS did not swap in a late filing penalty. Under IRM 20.1.2.4.3, when the incomplete return penalty is abated under Rev. Proc. 84-35, the late filing penalty is not assessed.

Templates: the reasonable cause letter can be adapted, and the penalty abatement letter guide covers structure.

Reassessment and the BBA question

Relief under 84-35 is conditional. The IRM instructs employees to warn the partnership that the penalty will be reassessed if it is later determined “any partner was not a qualifying partner; or, if any partner filed late; or, if any partner failed to report their share of partnership income on their return”. A later examination of a partner that finds unreported partnership income can bring the penalty back.

The procedure was written around the TEFRA small partnership definition in IRC 6231(a)(1)(B), which the Bipartisan Budget Act of 2015 repealed for partnership taxable years beginning after December 31, 2017. Chief Counsel answered the resulting question in PMTA 2020-01 (POSTN-120753-19, Nov. 19, 2019), advice to the Office of Servicewide Penalties on the applicability of the procedure to taxable years beginning on or after January 1, 2018: “Revenue Procedure 84-35 is not obsolete and continues to apply.” The memorandum reasons that the reference to IRC 6231(a)(1)(B) was only a means of defining small partnerships, that the repeal does not affect the scope of the IRC 6698 penalty, and that the IRS may require partnerships claiming relief to demonstrate they are entitled to it. The memorandum states that it may not be used or cited as precedent, so cite the revenue procedure and the IRM, not the memo, in the request. The current IRM (rev. 12-30-2025) still lists the Rev. Proc. 84-35 criteria in IRM 20.1.2.4.3.1 as a relief provision for the IRC 6698 penalty and states the tests directly rather than by reference to the old definition, and the CP162A notice page (reviewed August 2026) still tells recipients the partnership may qualify under the procedure, so the IRS continues to apply it. Whether a partnership is eligible to elect out of the BBA regime is a separate question with its own rules; see electing out of BBA and TEFRA partnership procedures.

Questions practitioners ask