IRC 6698 and IRC 6699: Partnership and S Corporation Failure to File Penalties

1. Overview: Why IRC 6698 and IRC 6699 Matter to Pass-Through Practitioners

The IRC 6698 partnership failure to file penalty and the IRC 6699 S corporation failure to file penalty are the dedicated penalty regimes for two of the most common pass-through entity types. Unlike the IRC 6651 failure-to-file penalty, which scales with the tax owed and applies to individuals and C corporations, IRC 6698 and IRC 6699 are headcount-based: the penalty multiplies by the number of partners or shareholders and by the number of months the return is late. The result is a penalty that can be substantial even when the entity owes no tax at all.

Both penalties share the same structural DNA: per-partner or per-shareholder, per-month accrual from the day after the return's due date (or extended due date, if a valid extension is on file), a 12-month cap, and the same indexed dollar amount per period. The 2026 indexed rate is approximately $235 per partner or shareholder per month -- though practitioners should verify the current indexed amount through IRS.gov or the applicable Revenue Procedure before using this figure in client communications or abatement requests. The dollar amount is adjusted annually under the same Revenue Procedure that indexes other penalties.

For practitioners representing partnerships and S corporations, mastering these two provisions means understanding: how the penalty accumulates, the role of Form 7004 extensions, the available abatement paths (reasonable cause and First-Time Abatement), how to read and respond to IRS notices CP162 and CP165, and how 2026 legislative complexity from the One Big Beautiful Budget Act (OBBBA) may drive higher late-filing rates in the near term.

Related filing context is covered in companion guides on IRC 702 partnership distributive share and IRC 703 partnership taxable income and elections, both of which frame the Form 1065 obligations that IRC 6698 penalizes for late or non-filing. For S corporation structural context, see the guides on IRC 1361 S corporation eligible shareholders and IRC 1362 S corporation election.

2. IRC 6698: Failure to File a Partnership Return

IRC 6698 imposes a penalty on any partnership required to file a return under IRC 6031 (Form 1065) that fails to file that return on or before the date prescribed for filing, including any applicable extension obtained under IRC 6081. The penalty is assessed against the partnership as an entity, not against the individual partners.

2.1 Penalty Computation

The penalty equals the product of: (a) the number of persons who were partners in the partnership during any part of the taxable year, multiplied by (b) the indexed dollar amount per month, multiplied by (c) the number of months (or fractions of months) during which the failure continues, up to a maximum of 12 months.

For 2026, the indexed monthly amount is approximately $235 per partner (verify the current indexed amount at IRS.gov or the applicable Revenue Procedure). For a 10-partner partnership that is 12 months delinquent, the maximum penalty is approximately $28,200. For a 5-partner partnership over the same period, the maximum is approximately $14,100. These figures do not include interest, which accrues on the penalty balance under IRC 6601.

2.2 Partners Counted

The penalty multiplier uses the number of persons who were partners at any point during the taxable year, not just at year-end. A partnership that had 15 partners in January and reduced to 10 by December would use 15 as its multiplier. Practitioners should request the IRS's partner count from CP162 and compare it to the Schedule K-1 population reflected on the filed or to-be-filed Form 1065.

2.3 Partial Months Count as Full Months

Any fraction of a month in which the failure continues counts as a full month. A partnership return due March 15 that is filed on March 16 has been one month late for penalty purposes. A return filed on April 14 (30 days after the original due date) has been two months late: month one runs from March 15 to April 14, and the fraction of the second month (April 14 to April 15) counts as month two. Practitioners counting penalty months should always err toward the higher count when estimating exposure.

2.4 Interaction with Form 1065 Filing Context

The filing obligation that IRC 6698 penalizes is the Form 1065 requirement under IRC 6031. The IRC 702 partnership distributive share rules determine what items must be separately stated and reported on Schedule K-1 -- information that flows from a complete and timely Form 1065. Similarly, the partnership-level elections and income computation framework under IRC 703 partnership taxable income and elections governs how the Form 1065 is constructed. A late return delays all of these downstream reporting obligations for partners.

3. IRC 6699: Failure to File an S Corporation Return

IRC 6699 mirrors IRC 6698 in all essential respects, substituting "S corporation" for "partnership" and "shareholders" for "partners." An S corporation required to file Form 1120-S under IRC 6037 that fails to do so by the due date (including extensions) is subject to a penalty computed per shareholder per month, at the same indexed rate, with the same 12-month cap.

3.1 Penalty Computation for S Corporations

The formula is identical: number of shareholders multiplied by the indexed monthly rate multiplied by months of delinquency (up to 12). For a 5-shareholder S corporation using the illustrative 2026 rate of approximately $235 per shareholder per month, the maximum penalty is approximately $14,100. For a 100-shareholder S corporation (the statutory maximum under IRC 1361), the maximum penalty is approximately $282,000 -- a figure that becomes very significant for larger S corporations.

3.2 Penalty Applies Even When No Tax Is Due

Like IRC 6698, IRC 6699 does not require any tax to be owed. The S corporation's status as a flow-through entity means it generally pays no entity-level income tax, but this provides no defense to IRC 6699. The penalty turns on the failure to file the information return on time, not on any tax liability of the entity. This point requires clear communication to S corporation clients who assume that a zero-tax-due entity faces no compliance risk.

3.3 Shareholder Count and IRC 1361 Interaction

The number of shareholders used in the IRC 6699 calculation should correspond to the IRC 1361 shareholder population for the tax year. Husband-and-wife joint owners count as one shareholder under IRC 1361(c)(1), which can affect the penalty multiplier. Practitioners should verify that the IRS's CP165 notice uses the correct shareholder count, particularly in years with ownership changes, estate transfers, or trust-held shares.

Situations involving IRC 1362 S corporation election complications -- such as inadvertent termination followed by late remediation -- can create ambiguity about the entity's filing obligation (as an S corporation versus a C corporation) and the applicable penalty regime for the affected year. In these situations, both the S-corp filing compliance strategy and the penalty exposure should be analyzed together.

4. IRC 6698 vs. IRC 6699 vs. IRC 6651: Side-by-Side Comparison

The following table places the three primary failure-to-file penalty regimes side by side across the dimensions most relevant to practitioner decisions. Note that the dollar amounts shown for 2026 are approximate and should be verified against current IRS guidance before client use.

5. Form 7004 Extension: What It Does and Does Not Do

Partnerships and S corporations routinely use Form 7004 to obtain an automatic six-month extension of time to file. When properly filed on or before the original due date, Form 7004 shifts the return's due date by six months, and IRC 6698 or IRC 6699 begins accruing -- if the return is still not filed -- from the extended due date, not the original due date. A valid extension eliminates any penalty for the period between the original due date and the extended due date.

5.1 Requirement for a Valid Extension

For Form 7004 to constitute a valid extension for IRC 6698 and IRC 6699 purposes, the form must be: (a) filed on or before the original due date of the return; (b) properly completed with the correct EIN and tax period; and (c) submitted to the correct IRS service center or through an approved e-file channel. Partnerships and S corporations are not required to estimate and remit tax with Form 7004 (because most owe no entity-level income tax), but accuracy and timely submission are non-negotiable.

5.2 Extensions and the Downstream K-1 Effect

Even a valid extension has downstream costs. When Form 1065 or Form 1120-S is filed late (even within the extension period), the issuance of Schedule K-1 to partners and shareholders is delayed. Partners and shareholders who need K-1 data to complete their own returns may face IRC 6651 failure-to-file penalties on their individual returns. A partnership or S corporation that extends its own filing deadline should communicate that extension timeline clearly to its partners and shareholders so they can manage their own extension filing obligations.

6. Reasonable Cause Defense

IRC 6698(a) and IRC 6699 each incorporate the same reasonable cause exception: no penalty is imposed if the failure to file is due to reasonable cause and not due to willful neglect. The burden is on the taxpayer to establish reasonable cause through a written statement submitted to the IRS service center that assessed the penalty.

6.1 What Qualifies as Reasonable Cause

The IRS evaluates reasonable cause under the standard articulated in Treas. Reg. 301.6652-2(c): whether the partnership or S corporation exercised ordinary business care and prudence but was still unable to file on time. Recognized grounds include:

• Death or serious illness of the responsible person. The managing partner, tax matters partner, designated partnership representative (BBA partnerships), or officer responsible for filing must have been personally incapacitated, or a member of their immediate household must have experienced a serious illness that directly disrupted the filing process. Institutional illness (e.g., a key employee) is evaluated by the IRS but is less consistently accepted.
• Fire, casualty, or natural disaster. Destruction of books and records by flood, fire, hurricane, or other disaster is recognized. The IRS often provides blanket relief notices for federally declared disasters -- practitioners should check for any applicable disaster-area relief that covers the entity's location and tax period.
• Genuine reliance on professional advice. Reliance on a qualified tax advisor who gave affirmative (and incorrect) advice that no return was required can constitute reasonable cause. This is distinguishable from the "ignorance of the law" rejection: the taxpayer must show active, reasonable reliance, not a passive failure to inquire. This is narrower than it appears and requires documentation of the specific advice received.
• IRS-acknowledged processing delay. Where the IRS has issued an official notice or news release acknowledging processing delays that affected a category of taxpayers, affected entities may cite that acknowledgment in their reasonable cause statements.

6.2 What Does Not Qualify

• Ignorance of the filing deadline. Not knowing the due date for Form 1065 or Form 1120-S is not a recognized defense. The IRS holds entities to a constructive knowledge standard for filing obligations.
• Cash flow problems. Because IRC 6698 and IRC 6699 are not tax-based penalties, financial hardship is irrelevant. There is no tax to pay; the failure is a failure to file information.
• Accountant workload or scheduling conflicts. Mere busyness of the tax preparer, absent a specific incapacitating event, is not reasonable cause. Practitioners should not frame an explanation in terms of the preparer's workload; the analysis is always about the entity's exercise of ordinary care.
• Reliance on an extension that was never filed. Assuming an extension was filed without actually filing it is not reasonable cause for the failure.

6.3 How to Write and Submit the Abatement Request

The abatement request is a business letter addressed to the IRS service center. There is no required form for a reasonable cause statement, but many practitioners also file Form 843 (Claim for Refund and Request for Abatement) concurrently to create a formal claim record. The body of the letter should lead with the legal standard (ordinary business care and prudence), apply it to the specific facts, attach supporting exhibits, and close with a specific request for full or partial abatement of the assessed penalty. Practitioners who call the IRS to discuss the penalty before writing should document the call with date, time, representative name, and employee ID.

7. First-Time Abatement (FTA) for IRC 6698 and IRC 6699

First-Time Abatement is an administrative waiver available to entities that have maintained a clean compliance record for the three tax years immediately preceding the year at issue. It is available for IRC 6698 and IRC 6699 penalties under IRM 20.1.1.3.6.2 -- the same policy framework that governs FTA for the IRC 6651 failure-to-file penalty for individuals and C corporations.

7.1 FTA Qualification Criteria

To qualify for FTA on an IRC 6698 or IRC 6699 penalty, the entity must satisfy all three of the following:

1. Filing compliance for three prior years. The entity must have filed, or obtained a valid extension for, all required returns for each of the three tax years preceding the penalty year. A single unfiled return in the prior three years disqualifies the entity from FTA for that penalty year.
2. No penalties assessed in the three prior years. The entity must have no assessed penalties (other than the estimated tax penalty) in the three prior tax years. A prior FTA waiver counts as a "clean" year (no assessed penalty) for purposes of subsequent years.
3. No outstanding payment obligations. The entity must have no outstanding balance of tax or penalties from prior periods. If the entity has an active installment agreement and is current on payments, the IRS generally treats that as satisfying the payment obligation requirement.

7.2 How to Request FTA

FTA can be requested by telephone (IRS Business Tax Line: 800-829-4933) or in writing. The telephone route is faster: a collections representative can verify the entity's filing and payment history in real time and approve the waiver during the call. The representative will note the waiver in the entity's account, and a written confirmation is typically mailed within 30 days.

The written route uses Form 843 or a formal abatement letter. In the letter, the practitioner should cite IRM 20.1.1.3.6.2 by section reference, state that the entity meets all three criteria, and request written confirmation of the abatement. Where both FTA and reasonable cause are being asserted, lead with FTA (less documentation required) and include the reasonable cause narrative as an alternative ground in case the entity's compliance history does not survive the IRS's verification.

7.3 Combining FTA and Reasonable Cause

A single abatement request may assert both FTA and reasonable cause. Presenting both grounds is best practice when there is any doubt about FTA eligibility. The IRS applies FTA first; if denied, the reasonable cause analysis proceeds. Submitting both in one letter avoids the need to file a follow-up request and preserves the entity's right to both paths in the event the IRS's initial response addresses only one ground.

8. IRS Notices: CP162 and CP165

The IRS uses two distinct notice types for IRC 6698 and IRC 6699 penalties. Identifying the correct notice is the starting point for any response.

8.1 CP162: Partnership Notice

CP162 (Penalty Charged for Partnership Return) is issued to partnerships that the IRS has identified as failing to file Form 1065 by the due date. The notice sets out: the tax year at issue, the number of partners the IRS is using as its multiplier, the monthly dollar rate applied, the number of months charged, and the total penalty assessed. Before responding, the practitioner should verify all four variables against the partnership's actual records, because errors in partner count or month count are common and can produce materially overstated penalties.

8.2 CP165: S Corporation Notice

CP165 is the S corporation equivalent of CP162. It carries the same structure and should be reviewed with the same verification approach: confirm the shareholder count the IRS used, the monthly rate, and the months charged. Common errors include using the wrong tax year's shareholder count (particularly after ownership changes), using total shares outstanding rather than number of shareholders, and failing to apply the IRC 1361(c)(1) rule that treats a husband-and-wife pair as one shareholder.

8.3 Step-by-Step Response Procedure

1. Obtain Form 2848. Get a signed power of attorney from the partnership or S corporation so the IRS can communicate with the practitioner directly.
2. Verify the notice facts. Check partner/shareholder count, monthly rate, and months charged against the entity's records and any filed Form 7004.
3. Confirm or contest the filing record. If a return was filed, obtain a copy of the filing confirmation (electronic acknowledgment or certified mail receipt). If the IRS's records do not reflect receipt, the return may need to be re-filed with documentation of the original filing attempt.
4. Determine abatement strategy. Assess whether FTA is available (check 3-year history), whether reasonable cause exists, and whether the penalty calculation itself contains errors.
5. Submit the response. Send a response letter (with Form 843 if filing a formal claim) to the address on the notice by the deadline, via certified mail. Include all supporting documentation.
6. Follow up. If no response is received within 60 days of the IRS's stated response window, call the IRS Business Tax Line and reference the notice number and EIN.

9. Electronic Filing Rejection and the Cure Window

An electronic submission that is rejected by the IRS is treated as if it had never been filed. The IRS e-file system generates a rejection notice with a specific error code explaining why the submission was not accepted. Common rejection causes for Form 1065 and Form 1120-S include EIN mismatches, duplicate filing indicators (prior return on file for the same period), and schema validation errors from incorrect data formatting.

The IRS allows a cure window for electronically rejected returns. Partnerships and S corporations generally have five calendar days from the date of the initial rejection to correct the error and retransmit. If the corrected return is accepted within that window, it is treated as filed on the date of the original transmission -- preserving the timely-filing status and avoiding IRC 6698 or IRC 6699 penalties. If the five-day window closes without a successful retransmission, the entity must file on paper to cure the rejection, and the penalty start date is the original due date (not the date of the retransmission).

When the cure window has been missed and the penalty begins accruing, the original rejection and retransmission attempt constitute useful supporting documentation for a reasonable cause argument. The practitioner should document: the original transmission date and time, the rejection code and reason, the steps taken to identify and correct the error, and the date the corrected return was successfully filed. This narrative supports the "ordinary care and prudence" standard even where the strict deadline was missed.

10. Foreign Partnerships With US Filing Obligations

A foreign partnership is subject to IRC 6031 -- and therefore to IRC 6698 -- if it has US partners and US-source income, or if it otherwise meets the filing threshold under Treas. Reg. 1.6031(a)-1. The penalty structure is identical to that applied to domestic partnerships: per-partner (including foreign partners who are US persons), per-month, up to 12 months, at the same indexed rate.

Foreign partnerships often operate with US compliance infrastructure that does not fully account for US information return deadlines, which differ from the filing schedules of the partnership's home country. Practitioners advising cross-border structures should confirm that the US filing obligation is on the compliance calendar and that a responsible US-based person or agent has authority and resources to ensure timely Form 1065 preparation and filing.

Where a foreign partnership's late filing is attributable to genuine information-gathering delays from non-US jurisdictions -- such as waiting for foreign financial statements that drive the US Schedule K-1 computations -- those facts may support a reasonable cause argument. The quality of documentation from the foreign jurisdiction and the partnership's overall compliance posture will bear on the IRS's receptiveness to such an argument.

11. Interaction With IRC 6651 in Multi-Entity Scenarios

IRC 6698 and IRC 6699 apply at the entity level; the parallel IRC 6651 failure-to-file penalty applies at the individual or C corporation level. These are distinct penalties assessed against distinct taxpayers, and they can both arise from the same underlying failure in a multi-entity structure.

The mechanism is straightforward. A partnership that files Form 1065 late delays the issuance of Schedule K-1 to its partners. Individual partners who are waiting for K-1 data to complete their Form 1040 may be unable to file accurately by the individual return's due date (typically April 15, or October 15 with a Form 4868 extension). If those partners also fail to file timely, they face IRC 6651(a)(1) failure-to-file penalties on their individual returns -- penalties that are their responsibility alone, separate from the partnership's IRC 6698 exposure.

Practitioners managing a partnership or S corporation that is filing late should promptly communicate the expected K-1 delivery timeline to all partners or shareholders so each can evaluate their own extension filing needs. An individual partner or shareholder who files a timely Form 4868 extension -- even without knowing the exact K-1 amounts -- suspends their own IRC 6651 exposure through the extended individual due date. The estimated tax payment required with Form 4868 can be computed using prior-year K-1 allocations or an estimated current-year share if actuals are not yet available.

12. OBBBA 2026 and the Late-Filing Risk Landscape

The One Big Beautiful Budget Act (OBBBA) enacted in 2026 introduced significant changes to partnership and S corporation taxation. Among the provisions most relevant to pass-through practitioners are changes to basis adjustment rules, modifications to the loss limitation framework applicable to partners and S corporation shareholders, and expansions of the qualified business income (QBI) deduction. These changes directly affect the complexity of Form 1065 and Form 1120-S preparation for the 2025 and 2026 tax years.

In addition, OBBBA's treatment of S corporation shareholders in the context of the updated QBI framework intersects with the IRC 1361 shareholder structure, which determines the IRC 6699 penalty multiplier. Practitioners advising S corporations on OBBBA compliance should integrate the IRC 6699 penalty risk analysis into their overall compliance planning rather than treating it as a separate administrative matter.

13. Frequently Asked Questions

Section A: Statutory and Computational Questions

Section B: Relief and Abatement Questions