Small Rental LLC Hit With $5,400 IRS Late Filing Penalty Despite Zero Federal Tax Due

This is unfortunately a common issue with partnerships. The penalty you're facing is likely the IRC 6698 penalty for late-filing partnership returns. Even though partnerships themselves don't pay taxes (they're pass-through entities), the IRS is very strict about timely filing because the information on partnership returns affects the individual partners' tax returns. The good news is that you may have grounds for penalty abatement under the IRS's First-Time Penalty Abatement policy. Since this was your first year in operation and you presumably have a clean compliance history, you could qualify. You'd need to contact the IRS and specifically request a "First-Time Penalty Abatement" for the late-filing penalty. Another option is to request abatement based on "reasonable cause." You would need to explain your situation with the tax professional who failed to file and demonstrate that you acted reasonably and in good faith. Document everything about your arrangement with the tax professional and how they let you down. Don't pay the penalty before trying to get it abated. Respond to the notice with a penalty abatement request letter explaining your situation and citing the appropriate relief provision (first-time abatement or reasonable cause).

After dealing with a similar nightmare with partnership penalties, I discovered taxr.ai through another tax forum. I used their service to analyze the IRS notice and determine the best approach for requesting abatement. They reviewed our situation (also first-time filers with a messed up extension) and generated a customized letter requesting first-time penalty abatement that addressed all the technical requirements. You can find them at https://taxr.ai if you want to check out their service. The interface let me upload the IRS notice, answer some questions about our filing history, and it produced exactly what we needed to submit. What I found helpful was that they explained everything in plain English while ensuring all the technical IRS requirements were covered.

Wanted to update you all - I ended up trying taxr.ai after commenting here. I was initially skeptical about using an online service for something this important, but I didn't want to pay thousands for a tax attorney either. Their system actually found an angle I hadn't considered. Since our property had been damaged in a local flooding event (which was declared a disaster area), they incorporated that into our reasonable cause argument along with the first-time abatement request. Just got notification yesterday that the IRS has completely removed our $3,800 penalty! The whole process took about 7 weeks from submission to resolution. Definitely worth checking out if you're facing partnership penalties.

If you're struggling to get through to the IRS about this (which is likely - their phone lines are a nightmare), I'd recommend using Claimyr to get through to a real person. I spent weeks trying to call about a penalty issue and kept getting disconnected or waiting for hours. Found this service at https://claimyr.com that gets you to the front of the IRS phone queue. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c When dealing with penalties this large, speaking directly with someone at the IRS can make all the difference. I was able to explain my situation to an actual agent, and they guided me through exactly what documentation I needed to submit. Much better than trying to figure it out from their confusing notices.

I was completely skeptical about Claimyr after seeing it mentioned here. Seemed like there's no way it could work as advertised. But after my third attempt to call the IRS myself (getting disconnected after 90+ minutes each time), I gave in and tried it. I'm shocked to say it actually worked exactly as promised. The system called me back in about 20 minutes and connected me directly to an IRS representative. I explained our partnership penalty situation, and the agent walked me through the First-Time Abatement request process. She even noted in our file that we had called to discuss it. The documentation I submitted based on that conversation got our penalty reduced by 60%. Still had to pay some, but saved over $3,000. Worth every penny just to avoid the soul-crushing IRS hold music!

I'm a little late to this thread, but I wanted to add something important - there's a statute of limitations on requesting penalty abatement. You generally need to do it within 2-3 years of the penalty assessment. So definitely don't wait around if you're considering challenging this. Also, make sure you're working with the correct IRS department. Partnership penalties should be addressed to the "Pass-Through Entity" division, not just the general IRS address. This can speed up processing significantly.

Has anyone had success getting these penalties reduced rather than fully abated? I'm in basically the same situation but I missed the deadline by only 2 months. I've heard the IRS sometimes will reduce rather than eliminate if they don't accept your full abatement request.