IRC Section 6698 Penalty: Small Partnership Exception and Abatement

The Form 1065 late filing penalty is $255 per partner for each month the return is late, up to 12 months, for returns required to be filed in 2026.¹ The charge is imposed on the partnership itself under IRC Section 6698, and it applies even though the partnership generally owes no federal income tax of its own. Because the amount multiplies by every partner and every month, a single missed deadline can produce a five-figure bill fast.

How the Penalty Is Calculated

Two numbers drive the math: how many partners the partnership had, and how many months the return is late. The rate for 2026 filings is $255 per partner per month.² The underlying statutory figure is $195, adjusted for inflation each year and rounded down to the nearest $5.³ For returns filed in 2027, the rate rises to $260.

The penalty runs for each month or fraction of a month the failure continues, capped at 12 months.³ “Fraction of a month” matters. A return filed two months and one day late counts as three full months. One day past any monthly anniversary adds another partner-count’s worth of penalty.

A few worked examples show how quickly this stacks up at the 2026 rate:

5 partners, 3 months late: $255 × 5 × 3 = $3,825.
5 partners, 12 or more months late: $255 × 5 × 12 = $15,300, and the cap holds no matter how long the return stays unfiled.
20 partners, 6 months late: $255 × 20 × 6 = $30,600.

The partner count sweeps in anyone who was a partner during any part of the tax year, not just those still in on the last day. A partnership that started the year with 10 partners and ended with seven can still be penalized based on all 10. The IRS assesses the amount against the partnership entity, not against individual partners’ capital accounts.

When the Penalty Applies

Two situations trigger it. The first is missing the filing deadline itself, including any approved extension.³ The second is filing on time but leaving out information the return is required to contain. Under IRC Section 6031, that includes each partner’s name and address and the amount of their distributive share of partnership income.⁴ A return missing any of that information is treated the same as no return at all for penalty purposes.

Form 1065 is due on the 15th day of the third month after the partnership’s tax year ends, which is March 15 for calendar-year partnerships.⁵ Filing Form 7004 by the original deadline buys an automatic six-month extension, moving a calendar-year deadline to September 15. The extension covers the filing date but not the obligation to furnish Schedule K-1s to partners, which are still tied to the original due date. Miss the extended date, and the penalty accrues from that extended date forward. No credit is given for having filed the extension on time.

The Small Partnership Exception Under Revenue Procedure 84-35

Some small partnerships can avoid the penalty entirely under Revenue Procedure 84-35, but not because they are excused from filing. The revenue procedure creates a presumption of reasonable cause when specific criteria are met, which effectively shields a qualifying partnership from the penalty even though the return was late.⁶ All five conditions have to be satisfied:

The partnership has 10 or fewer partners. A married couple filing jointly counts as one partner.
Every partner is a natural person (other than a nonresident alien) or the estate of a deceased partner. A partnership with a trust, an S corporation, a C corporation, or another partnership as a partner does not qualify.⁷
Each partner’s share of every item of income, deduction, and credit is allocated in the same proportion. Special allocations disqualify the partnership.
Each partner reported their full share of the partnership’s income, deductions, and credits on a timely filed individual return.⁶
The partnership did not elect to be subject to the consolidated audit procedures in place when the revenue procedure was issued.

Relief is not automatic. The partnership has to raise the exception after a penalty is proposed and be prepared to show it meets every one of the five conditions. One point of confusion worth naming: C corporations do not count as qualifying partners for this exception, even though an older statutory provision (the former TEFRA small partnership definition) did include them.⁸ Any entity partner other than a decedent’s estate takes Revenue Procedure 84-35 off the table.

First Time Abate

Partnerships with a clean compliance history often have a faster route than reasonable cause: the First Time Abate administrative waiver. It’s an IRS policy rather than a statutory right, and it waives the penalty for taxpayers who meet both of these tests:⁹

The partnership filed all required returns for the three tax years before the penalty year and either had no penalties during that period or had any prior penalties removed for a reason other than FTA.
The partnership has filed all currently required returns or has a valid extension in place.

FTA is usually the quickest option because it does not require proving reasonable cause. A partnership can request it by calling the IRS or by including the request in a written response to the penalty notice. If FTA is denied, a reasonable-cause request is still available, so trying FTA first costs nothing.

Reasonable Cause Abatement

Partnerships that don’t fit the small-partnership exception or FTA can still ask for abatement by showing reasonable cause. The bar is high: the partnership has to demonstrate that it exercised ordinary business care and prudence yet still could not file on time.³

Facts the IRS has accepted include the death or serious illness of the managing partner or the partnership’s tax professional, destruction of business records in a fire or natural disaster, and an inability to obtain the records needed to file. What consistently fails: forgetting the deadline, not having the money to pay a preparer, or relying on someone who turned out to be unqualified.

The formal request goes on Form 843, Claim for Refund and Request for Abatement.¹⁰ Attach documentation that tells the whole story: medical records, death certificates, police or fire reports, or detailed statements from partners explaining what happened and what was done to comply as quickly as possible. Specificity is what carries a reasonable-cause claim; vague hardship language rarely does.

1
Internal Revenue Service. Failure to File Penalty
2
Internal Revenue Service. Revenue Procedure 2024-40
3
Office of the Law Revision Counsel. 26 USC 6698 – Failure to File Partnership Return
4
Office of the Law Revision Counsel. 26 U.S. Code 6031 – Return of Partnership Income
5
Internal Revenue Service. Publication 509 (2026), Tax Calendars
6
Internal Revenue Service. PMTA-2020-01
7
Internal Revenue Service. Understanding Your CP162A Notice
8
Internal Revenue Service. Understanding Your CP162B Notice
9
Internal Revenue Service. Administrative Penalty Relief
10
Internal Revenue Service. Instructions for Form 843