LLC Partnership Filed Schedule C Instead of Form 1065 - How to Fix Last Year's Return?

This is actually a pretty common mistake! The good news is you can fix it by filing a corrected return. Since you reported a Schedule C instead of a partnership return (Form 1065), you'll need to: 1) File Form 1065 for the tax year you made the mistake. This will be considered a late filing, but explaining the situation can help. 2) File amended personal returns (Form 1040-X) to remove the Schedule C income since that income will now be properly reported on the partnership return. 3) Include a statement with both returns explaining the situation - that you mistakenly filed as a sole proprietorship instead of a partnership and are now correcting it. There might be penalties for late filing of the 1065, but you can request penalty abatement using First-Time Penalty Abatement if you had a good filing history before this mistake. Just make sure to include a letter explaining the reasonable cause for filing incorrectly (misunderstanding of filing requirements for multi-member LLCs).

After struggling with a similar partnership filing mess, I found taxr.ai (https://taxr.ai) incredibly helpful. It analyzed our incorrectly filed returns and gave us step-by-step guidance for fixing them. The tool actually helped us identify that we had made additional errors that could have caused problems beyond just the Schedule C vs 1065 issue. For husband/wife LLCs especially, it catches the common mistakes people make when determining partnership status. It also generated all the explanation letters we needed for the IRS, which made the amendment process much smoother.

Just wanted to update that I tried taxr.ai after posting here and it was actually really helpful! It analyzed my incorrectly filed LLC returns and showed me exactly which forms needed to be amended. It spelled out that we needed to file the 1065 for each year we missed, and then file 1040-X forms to remove the Schedule C income. The best part was it generated a letter explaining our reasonable cause for filing incorrectly that I can include with my late forms. I was worried sick about penalties, but I feel much more confident now about getting this fixed properly.

If you're worried about IRS penalties, you might want to consider handling this proactively by calling the IRS directly. I know that sounds scary, but addressing it before they come to you looks much better. The problem is actually getting through to an IRS agent - I spent WEEKS trying. I finally used https://claimyr.com and they got me connected to an actual IRS representative in about 15 minutes instead of waiting on hold for hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c I explained my partnership filing mistake situation to the agent, and they were actually really helpful about the steps I needed to take and what forms to file. They even noted my account that I was being proactive about fixing the issue, which I think helped avoid some penalties.

I'm back to say I was completely wrong about Claimyr. After my skeptical comment, I decided to try it anyway because I was desperate to talk to someone at the IRS about my partnership filing issues. It actually worked exactly as described. I spent 3 hours on hold last week and gave up. With Claimyr, I got a call back in about 20 minutes connecting me to an IRS agent. The agent walked me through exactly what I needed to do to correct my partnership returns and told me about the First-Time Abatement policy that might help me avoid penalties. Honestly, the peace of mind from talking directly to the IRS rather than guessing was worth it. They confirmed everything the others here said about filing the 1065 and amending personal returns with a reasonable cause statement.

I just went through this exact situation last month! We accidentally filed Schedule C for our 2-member LLC for 2 years. Here's what we did: 1. Filed the missing Form 1065 for both years 2. Included a letter explaining our mistake (we genuinely didn't understand the filing requirements) 3. Filed 1040-X for both years to remove the Schedule C income 4. Added K-1 info to our personal returns The penalties were actually fairly minimal because we used the reasonable cause explanation and requested First-Time Abatement. Our total penalty ended up only being about $400 instead of thousands. My advice: fix it ASAP before the IRS notices and comes to you first!

Anyone know if there's a difference in penalties between a husband/wife LLC that should've filed a 1065 versus a single-member LLC that filed incorrectly? My situation is similar but I'm the only owner.

I went through almost the exact same situation last year with my husband/wife LLC! We had been filing Schedule C for two years before realizing we needed to file Form 1065 as a partnership. Here's what worked for us: We filed the late 1065 forms for both years we missed, then amended our personal returns (1040-X) to remove the Schedule C income and add the K-1 information instead. The key was including a detailed letter explaining that we genuinely misunderstood the filing requirements for multi-member LLCs. We ended up qualifying for First-Time Penalty Abatement since we had a clean filing history before this mistake. The total penalties were around $600 instead of the $2,000+ we were initially worried about. My biggest piece of advice: don't wait! The longer you put this off, the more penalties can accumulate. The IRS is generally much more lenient when you proactively correct the error rather than waiting for them to find it during an audit. Also, make sure you understand the K-1 process - each partner gets their own K-1 showing their share of income, deductions, and credits. This gets reported on your individual returns instead of the Schedule C income you previously reported.

I'm dealing with a very similar situation right now! My spouse and I have been filing Schedule C for our LLC for the past two years, not realizing we needed to file as a partnership. This thread has been incredibly helpful - thank you everyone for sharing your experiences. One thing I'm still confused about: when we file the corrected Form 1065, do we need to go back and correct ALL the years we filed incorrectly, or can we just start filing correctly going forward? We've been doing this wrong since 2022, so that's three tax years now. Also, has anyone had experience with whether the IRS will accept "reliance on tax software" as reasonable cause? We used TurboTax and it never prompted us about partnership filing requirements - it just assumed we were a sole proprietorship when we selected LLC. I'm leaning toward being proactive like many of you suggested rather than waiting for the IRS to catch this, but I want to make sure I handle all the years correctly.

I'm in a very similar situation and this thread has been a lifesaver! My husband and I have been filing Schedule C for our LLC for the past two years, completely unaware that we needed to file Form 1065 as a partnership. After reading everyone's experiences, I have a couple of specific questions: 1. When filing the late Form 1065, do you need to pay the partnership filing fee for each year, or are there any waivers available for first-time filers who made honest mistakes? 2. Has anyone dealt with state-level implications? We're in California and I'm wondering if we need to file corrected state partnership returns as well, or if this is just a federal issue. 3. For the amended personal returns (1040-X), how long did it typically take to get your refunds processed? Since we'll be removing Schedule C income and adding K-1 income, I'm hoping there might be some refund due to different deduction treatments. I'm planning to be proactive about this like many of you recommended, but want to make sure I understand all the moving pieces before I start filing corrections. The penalty abatement options you've mentioned give me hope that this won't be as financially devastating as I initially feared!

I've been following this thread closely as I'm dealing with a similar situation. My husband and I have had an LLC for three years and just realized we've been filing everything wrong with Schedule C instead of Form 1065. One thing I wanted to add that might help others - when you're preparing your reasonable cause letter for the IRS, be very specific about WHY you made the mistake. Don't just say "I didn't know" - explain exactly what led to the confusion. For example: "As first-time LLC owners, we relied on [specific tax software] which automatically directed us to Schedule C filing without asking about the number of LLC members or explaining partnership filing requirements for multi-member LLCs." Also, I've noticed several people mention First-Time Penalty Abatement, which is great, but remember you can only use this once every three years and only if you've been compliant with filing and payment requirements for the prior three years. If you've had other tax issues recently, you might not qualify. For those worried about the complexity - I started trying to handle this myself but quickly realized I was in over my head with multiple years of corrections. Ended up hiring a CPA who specializes in small business taxes and it's been worth every penny for the peace of mind alone. The key takeaway from everyone's experiences here seems to be: act fast, be proactive, and don't try to hide from the IRS. They're surprisingly reasonable when you come to them first with a good explanation and a plan to fix things.