The Tax Attic with Jerry Coon

November 18, 2009 // 0 Comments

Penalty provisions in fine print E-file saves taxpayers millions The Worker, Homeownership and Business Assistance Act of 2009, as signed into law by President Obama on November 6, among several important provisions, had a penalty provision inserted within the fine print of the law. I think there is a lot of fine print in some of these laws being passed by Congress. This particular penalty provision concerns the filing of partnership and Sub S Corporation tax returns. Our tax system is set up so that both partnerships and Sub S Corporations are reporting entities, technically called pass-through entities. This means usually that neither one has to pay any tax. The tax returns are used to report the income and expenses of the partnership or Sub S. These items are passed through to the partners of the partnership or the shareholders of the Sub S via a Form K-1. These partners and shareholders then report the income and expenses of the reporting entity on their personal tax returns and are responsible for any tax due to that income. This presents a small problem to the Internal Revenue Service when it comes to penalizing a partnership or a Sub S for not filing a tax return on time. For the most part, penalties are based on the amount of tax due. No tax due = no penalties. Congress has ridden to the rescue, in this instance, and instituted flat-dollar-amount penalties based on the late filing of tax returns. For partnerships and Sub S Corporations, the Worker, Homeownership and Business Assistance Act of 2009 has increased these late-filing penalties to $195 per partner or shareholder per month the return is filed late. Not too many years ago, the penalty was $50. For instance, for a partnership that has five partners and is late filing its return by two months, the penalty will be $195 times 5 partners, or $975 per month, times 2 months equals $1,950. That’s a lot of penalty! At those rates, no one is going to knowingly file a partnership or Sub S return late. Another provision in the law affects tax preparers and indirectly taxpayers. Starting in the year 2011, any tax preparer filing more than 10 tax returns must file those returns electronically. Previously, […]