Guide to IRS Notice CP162
Penalties for Late, Incomplete, or Incorrectly Filed S-Corp or Partnership Returns
If you've received Notice CP162, the IRS is assessing penalties on your S-corp or partnership. The IRS also sends this notice to Real Estate Mortgage Investment Conduits (REMIC) that are treated as partnerships. The penalties associated with this notice can be extremely significant, and they may grow if you fail to respond to the notice.
Keep reading to learn why you received this notice and to learn how to respond.
What Is Notice CP162?
Notice CP162 is a notice that the IRS sends to partnerships, S-corps, and REMICs for the following reasons:
- Unfiled returns
- Late returns
- Incomplete returns
- Returns that were paper filed when they should have been e-filed
The notice outlines your penalties and tells you how to get back into compliance. In some cases, the IRS also uses Notice CP162A. This notice is nearly identical to the CP162 notice.
Penalties on Notice CP162
The penalties associated with Notices CP162 and CP162A can be extremely high. Because the penalties are based on the number of partners rather than on business profits, they can actually exceed the income of small partnerships and S-corps. To protect your business, you should respond to this notice promptly and get help from a tax pro if needed.
As of 2022, the IRS may assess a penalty of $210 per partner per month on late or incomplete returns. The penalty is assessed the very first day you are late for up to 12 months. For instance, if you have a two-member partnership and you file a day late, your penalty is $420.
A 12-member partnership that files six months late may incur a penalty of $15,120. Again, these penalties are not based on or restricted by your profits. Even if your business made very little or suffered a loss, you risk incurring these penalties.
Only partnerships with more than 100 members are required to e-file. The failure to e-file penalty is $260 for every partner over the threshold. For instance, if you have 110 partners, you will pay the penalty times 10.
All of these penalties increase annually with inflation, but they may also increase if the IRS updates the tax code.
Responding to Notice CP162
If you received Notice CP162 or CP162A, you should take steps to rectify the issue as quickly as possible. Failure to respond to the notice can lead to more penalties. The IRS also assesses interest on unpaid penalties.
To avoid additional penalties, get back into compliance by filing your late return or completing your incomplete return. If the penalty is for filing late or not e-filing, you only have to pay the penalties. In both cases, you can apply for penalty abatement.
Paying the Penalties on CP162
To pay the penalties on CP162, you can use the IRS's EFTPS system or mail a check to the IRS address printed on the notice. If you pay the penalties, you can still request abatement. The IRS issues refunds when it abates penalties retroactively.
Requesting Notice CP162 Penalty Abatement
To request penalty abatement for the penalties listed on Notices CP162 or CP162A, send the IRS a list of the penalties you want to be forgiven and a written explanation of why you filed late, provided incomplete information, or failed to e-file.
The IRS often removes penalties for reasonable cause, but to increase your chance of getting the penalties removed, you need to ensure that your request for penalty abatement is filed correctly.
Small partnerships may qualify for penalty abatement if they meet the following conditions:
- Ten or fewer members — note that married couples filing jointly count as a single member.
- All partners are natural persons or the estates of natural persons.
- None of the members are non-resident aliens.
- Each partner's proportionate share of partnership items is the same as their proportionate share of other partnership items — for instance, if a partner makes 10% of the capital contributions, they must also cover 10% of expenses and receive 10% of profits.
- All partners reported their share of income correctly and on time on their individual income tax returns.
- The partnership did not elect to be subject to the consolidated audit proceedings — in other words, the partnership members have agreed to be subject to individual audits if the partnership is ever audited.
If you meet these criteria, write "applying for abatement under the rules of Rev. Proc 84-35" on your penalty abatement request. The IRS assumes that you deserve penalty abatement if you meet these criteria. But if you submit false information, the IRS can reinstate your penalties and apply a false statement penalty.
What If You Disagree With IRS Notice CP162
If you disagree with the information on Notice CP162 or CP162A, you can take the following actions:
- If the CP162 penalty is for late filing, provide proof that you mailed the return on time or filed an extension.
- If the CP162 penalty is for failing to file electronically, provide proof that you were not required to e-file because you have fewer than 101 partners or provide a copy of your e-filing waiver.
Rules Related to Notice CP162 and CP162A
Again, you may receive these notices if you file late, file an incomplete return, or don't e-file as required. To help you understand why the IRS is assessing penalties on your account, here is a brief overview of the relevant sections of the Internal Revenue Code.
Due Dates for Partnership and S-Corp Returns
Partnerships and S-corps that use a calendar year, must file their returns by March 15. If you use a non-calendar fiscal year, your return is due on the 15th day of the third month after the end of your fiscal year.
Note that payments are not due with either of these returns. The income reported on these returns flows to the partners' or members' returns, and any tax owed should be paid with those returns.
Information Required on Partnership and S-Corp Returns
The IRS also sends out Notice CP162 or CP162A if you have submitted an incomplete return. To find out what needs to be included on each return, reference the instructions for the following returns:
- Form 1065 Instructions for U.S. Return of Partnership Income
- Form 1120-S Instructions for U.S. Income Tax Return for S-Corporations
- Form 1066 Instructions for U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return
You may want to work with a tax professional to ensure you include the correct information and respond to the IRS's requests properly.
What to Expect When You Respond to Notice CP162
Processing time for a response to Notice CP162 can vary. If the IRS doesn't receive your response within two weeks, the agency may start collection actions on your account. Unfortunately, in some cases, the IRS sends the collection notice before it processes the response.
Some taxpayers respond to Notice CP162 immediately, but because the IRS is understaffed and busy, it may not open the response for a while. At the same time, an automatically generated collection letter may go out. If you receive a collection letter after responding to Notice CP162, there may be an error or a processing issue — reach out for help.
Get Help With Notice CP162
Dealing with the IRS on your own can be complicated and stressful. To get help with Notice CP162, Notice 162A, or any other IRS issues, reach out to a tax pro today. Using TaxCure's search feature, you can easily find a tax professional in your local area who is experienced with your concern.