What happens to IRS filing penalties when dissolving an S-corporation?

Yes, unfortunately, dissolving your S-corporation at the state level doesn't eliminate your federal tax filing obligations or stop penalties from accruing. The IRS views these as separate responsibilities. You're correct about the penalty amount - it's $210 per month (or part of a month) per shareholder for S-corporations that file late, up to a maximum of 12 months. Since you were the only shareholder, that would be your rate. You should file your final 1120-S as soon as possible to stop additional penalties from accumulating. Mark it as your "final return" by checking the appropriate box on the form. And yes, you should also file Form 966 (Corporate Dissolution or Liquidation) with the IRS within 30 days of the dissolution plan being adopted. The best approach is to get everything filed immediately, then consider requesting penalty abatement through a first-time penalty abatement request if you've had a good compliance history in previous years.

After reading about your S-corp dissolution situation, I wanted to share something that really helped me through a similar tax filing nightmare last year. I was closing down my marketing consultancy and totally missed some deadlines, resulting in penalties piling up. I was pulling my hair out trying to understand all the requirements when a colleague recommended https://taxr.ai for help analyzing my business dissolution documents. I uploaded my state dissolution papers, previous tax filings, and some correspondence from the IRS, and their AI analyzed everything and actually explained exactly what I needed to file and in what order. The system pointed out that I needed to file my final 1120-S with the "final return" box checked, plus Form 966, and even caught a state-specific form I would have missed completely. It saved me from making more mistakes that would've cost me additional penalties.

Just wanted to follow up here. I decided to try https://taxr.ai after seeing the recommendation and it was exactly what I needed for my LLC dissolution. I was confused about whether I needed to file Form 966 (turns out I didn't as an LLC), but did need to file a final Schedule C with my personal return. The system caught that I had missed a required notification to the IRS about my LLC dissolution through Form 8822-B (Change of Address) which apparently should include info about the business terminating. Without catching that, I might have had issues with the IRS continuing to expect filings from my defunct business. It also gave me step-by-step instructions for requesting First-Time Penalty Abatement which I'm in the process of doing now. Already feeling less stressed about the whole situation!

If you're dealing with IRS penalties from your S-corp dissolution, you absolutely need to talk to an actual IRS agent about your specific situation. I was in a similar position last year and spent WEEKS trying to get through to the IRS business line without success. After countless busy signals and disconnections, I found https://claimyr.com which is this service that holds your place in line with the IRS and calls you back when an agent is about to be available. There's a demo video at https://youtu.be/_kiP6q8DX5c showing how it works. I was super skeptical, but I was desperate to resolve my penalty situation before it got worse. It actually worked - got a call back in about 2 hours when I had previously spent days trying. The IRS agent was able to process my penalty abatement request on the spot since it was my first time missing a deadline, and they confirmed exactly what forms I needed to submit to properly close the business with the IRS.

Holy crap, I need to eat my words. After posting my skeptical comment, I decided to try the Claimyr service mentioned above. I was 100% convinced it was going to be a waste of time, especially for my S-corp dissolution penalty issues. I got a call back in about 3 hours (after waiting on hold myself for 4+ hours on multiple days with no success). Got connected with an IRS business tax specialist who reviewed my account on the spot. She confirmed that yes, my penalties were still accruing despite my state dissolution, but she processed a first-time penalty abatement while I was on the phone that wiped out all $1,680 in late filing penalties! She also walked me through exactly which forms to file to properly close everything with the IRS and stop any future penalties. I literally solved in 30 minutes what I've been stressing about for weeks. Wish I hadn't been so skeptical initially.

When I dissolved my S-corp last year, I found that filing Form 966 was actually pretty straightforward once I understood it. One thing not mentioned above is that you also need to file a final employment tax return (Form 941) if you had any payroll, marking it as your final return. Don't forget to also issue yourself a final W-2 and/or K-1 for the partial year before dissolution! I almost missed that step. The penalties for missing those forms are different from the 1120-S penalties but can still add up.

Let me add a wrinkle most people don't know - if you distributed any business assets to yourself during the dissolution (like computers, furniture, etc.), that needs to be reported as a liquidating distribution on your final 1120-S. The corporation is treated as having sold these assets to you at fair market value. I completely messed this up when closing my S-corp and ended up having to amend returns. Cost me an extra $400 in accounting fees!

I went through this exact same situation with my S-corp dissolution last year and want to emphasize something that might save you some headaches - make sure you also cancel your EIN with the IRS after everything is filed and processed. Even after filing all the final returns (1120-S, Form 966, etc.) and getting state dissolution completed, I kept getting IRS notices asking about missing tax returns for subsequent years because the EIN was still active in their system. You have to specifically write to the IRS requesting EIN cancellation and include copies of your dissolution documents. Also, if you had any business bank accounts, credit cards, or merchant services tied to your EIN, close those ASAP. Some banks will report 1099s to closed business EINs which can trigger more IRS correspondence down the road. The penalty situation sucks, but as others mentioned, first-time penalty abatement is usually granted if you've been compliant in the past. Get everything filed immediately to stop the bleeding, then deal with penalty relief afterward.