Penalty for Late Filing of S Corporation Does Not Require Supervisor Approval

(Parker Tax Publishing April 2019)

In a collection due process case, the Tax Court granted summary judgment for the IRS and held that an S corporation was liable for a penalty under Code Sec. 6699 even though its shareholders obtained an extension and timely filed their personal income tax returns and even though the IRS had excused the penalty for another year on similar facts. The Tax Court also held that, because the Code Sec. 6699 penalty was automatically calculated through electronic means under Code Sec. 6751, written approval by the immediate supervisor did not need to precede assessment of the penalty. ATL and Sons Holdings, Inc. v. Comm'r, 152 T.C. No. 8 (2019).

Background

ATL and Sons Holdings, Inc. (ATL) is an S corporation with two shareholders, Ralph and Cassandra Allen. For their 2012 personal income tax return, the Allens timely filed a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, to request an extension and were granted a six-month extension to file their return. They filed their Form 1040 on October 14, 2013. Because the extension had been granted, the IRS did not assess any late filing penalties under Code Sec. 6651(a)(1)..

ATL filed a 2012 Form 1120S, U.S. Income Tax Return for an S Corporation, in September 2013, almost six months late. ATL did not file a Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. In November 2013, the IRS assessed a penalty of $2,340 for the late filing under Code Sec. 6699. ATL's IRS transcript showed that the assessment of the penalty was computer generated; no supervisory approval was obtained before the penalty was assessed.

Mr. Allen filed a Form 4868 for an extension to file his 2013 Form 1040, but did not file a Form 7004 for ATL. Mr. Allen then filed his Form 1040 and ATL's Form 1120S within the period of the extension granted for the Form 1040. The IRS initially proposed a penalty against ATL for the late Form 1120S for 2013, but later relented. However, the IRS did not so relent for 2012, the year at issue in this case.

In April 2015, the IRS credited an overpayment for 2013 of $394 against ATL's outstanding 2012 penalty liability. In January 2016, in an effort to collect the remaining unpaid penalty liability of $1,945, the IRS sent ATL a notice of intent to levy. ATL requested a collection due process (CDP) hearing. A settlement officer (SO) reviewed the file and verified the amount due; she also verified that ATL had requested no extension of the 2012 filing deadline.

The SO scheduled a telephone hearing with ATL for May 9, 2016. ATL did not contact the SO on the scheduled hearing date. The SO then sent a letter giving ATL until May 23, 2016, to submit additional information, but the SO received no additional information from ATL. Mr. Allen faxed a letter on ATL's behalf to the SO on May 23, 2016, explaining why he had missed the telephone hearing, challenging his liability for the penalty, disputing the amount of the penalty, and noting that the IRS had abated a similar penalty for 2013.

In June 2016, the SO issued a decision letter upholding the proposed levy. The SO determined that all legal and procedural requirements had been met and that ATL did not submit any proof for penalty abatement consideration and did not qualify for first-time penalty abatement because of the past penalty abatement. ATL filed a Tax Court petition challenging the SO's determination, and the IRS moved for summary judgment.

Analysis

Under Code Sec. 6699, an S corporation that does not file its Form 1120S on time is liable for a penalty of $195 per shareholder for each month the failure continues (up to 12 months), unless it is shown that the failure is due to reasonable cause. Code Sec. 6751 provides that no penalty may be assessed unless the supervisor of the individual making the determination personally approves the penalty in writing. Under Code Sec. 6751(b)(2), the supervisory approval requirement does not apply to additions to tax under Code Secs. 6651, 6654, or 6655, or to any other penalty automatically calculated through electronic means.

ATL argued that the Allens' extension of time to file their 2012 Form 1040 should have also applied to ATL's deadline for filing its 2012 Form 1120S. ATL challenged the amount of the Code Sec. 6699 penalty, contending that it should be the smaller of $135 or 100 percent of the tax paid late. ATL said it was entitled to an abatement of the penalty for 2012 because the same penalty was excused for 2013 after ATL pointed out to the IRS that an extension had been obtained for the Allens' Form 1040. ATL also argued that the reasonable cause exception should apply because, as ATL's two shareholders, the Allens were aware of the information required to be reported on ATL's 2012 return and no one else had been harmed by the late filing. ATL argued that the Code Sec. 6699 penalty was subject to supervisory approval because the reasonable cause provision in the statute prevented the penalty from being automatically calculated. ATL also claimed that it was improper for the IRS to apply its 2013 overpayment to the 2012 penalty liability before the issuance of the notice of intent to levy.

The Tax Court granted summary judgment for the IRS and held that ATL was liable for the Code Sec. 6699 penalty and that, because the penalty was automatically calculated through electronic means, written supervisory approval was not required. The Tax Court found that ATL's Form 1120S was filed almost six months late and that ATL did not obtain an extension of the filing deadline. The court noted that, although the shareholders of ATL (the Allens) received an extension to file their own 2012 Form 1040, an S corporation is an entity separate from its shareholders.

As to the Code Sec. 6699 penalty amount, the Tax Court found that ATL mistakenly posited the minimum penalty amount under Code Sec. 6651 as the limit of the Code Sec. 6699 penalty. The court explained that ATL's $2,340 penalty was correctly calculated as the monthly amount ($195) multiplied by the number of shareholders and multiplied by the number of months late ($195 x 2 x 6).

Observation: Beginning in 2015, the Code Sec. 6699 penalty is adjusted for inflation under Code Sec. 6699(e).

The Tax Court rejected ATL's contention that its 2012 penalty should be abated because the IRS excused the same penalty for 2013. The court found that each tax year stands on its own and must be separately considered, and the IRS may challenge in a succeeding year what was condoned or agreed to for a prior year. The court also rejected ATL's reasonable cause and good faith argument, finding that ATL failed to show that it exercised such care and prudence or that it was unable to timely file the Form 1120S. Finally, the Tax Court found that the Code Sec. 6699 penalty did not require supervisory approval because it was automatically calculated through electronic means. The Tax Court compared the Code Sec. 6699 penalty to the penalties explicitly excepted in Code Sec. 6751(b)(2)(A) and found that the Code Sec. 6699 penalty is similar to those penalties. The court explained that, like the penalty under Code Sec. 6651(a)(1) for the late filing of an individual tax return, the penalty for a late S corporation return is a simple and automatic computation based on the number of shareholders, the date the return was due, and the date it was filed. The court also noted that the assessment of ATL's penalty was a computer-generated assessment and that, under its recent holding in Walquist v. Comm'r, 152 T.C. No. 3 (2019), a penalty determined mathematically by a computer program without human involvement is calculated through electronic means.

The court disagreed that the reasonable cause provision in Code Sec. 6699 prevented the penalty from being automatically calculated. The court reasoned that the IRS determines liability for the penalty based on the objective facts of a taxpayer's return, and the burden of establishing reasonable cause is on the taxpayer. The possibility of such a defense, in the court's view, does not change the fact that the penalty itself is automatically calculated.

The Tax Court also found that Code Sec. 6402(a) specifically authorizes the IRS to credit overpayments against any liability and nothing prohibits it from engaging in other nonlevy collection actions, including offsetting payments from other periods, as the IRS did in this instance.

For a discussion of IRS levies, see Parker Tax ¶260,540. For a discussion of the penalty for failing to timely file an S corporation return, see Parker Tax ¶36,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com