The information in this article is up to date for tax year 2022 (returns filed in 2023).
For many tax professionals, the moment they file a return, they tend to file it away mentally as well. If that return is then rejected by the IRS, it can be all too easy for it to slip through the cracks as the rush of tax season demands your focus – particularly if it was a 1065 or 1120-S return.
While this oversight is easy to make, it can be costly for you or your clients, not to mention embarrassing for your business. But not to worry – there are simple steps you can take in your TaxSlayer Pro software to ensure you don’t fall victim to this common error.
What are Forms 1065 and 1120-S?
Both Form 1065 and 1120-S are versions of Schedule K-1, which reports “pass-through” earnings to the IRS. Form 1065 is for partnerships, and Form 1120-S is for S corporations, but both serve the same purpose. The partnership or S-corp must file this form to report each partner or shareholder’s share of the entity’s income, deductions, and credits. The information from Form 1065 or 1120-S is then entered on the taxpayer’s individual return.
Why are late penalties on 1065 and 1120-S so common?
With individual returns, failing to realize that a return has been rejected can delay a refund or delay payment on a balance due. This oversight can be embarrassing for a preparer, but it will usually be resolved rather quickly when the client calls the preparer to inquire about the status of the return.
However, for Partnerships and S Corporations, this omission may not be detected as quickly by the client, leaving it up to the preparer to recognize and resolve the IRSs rejection. This lack of detection occurs because the items on a 1065 or 1120-S are passed through to the partners/shareholders on a Schedule K-1.
Thereafter, the partner/shareholder reports the items on Schedule K-1 to the IRS on their individual tax return. If the underlying 1065 or 1120-S return was never filed (or was filed and rejected by the IRS), it only gets caught by the partner/shareholder if the IRS inquires about the source of their Schedule K-1, or otherwise sends an inquiry to the entity about the lack of a return. But these inquiries from the IRS will typically not occur for months, if not years, afterward. In the meantime, significant late filing penalties may be incurred.
When are Form 1065 and 1120-S due, and what are the late penalties?
Schedule K-1s (Form 1065 or Form 1120-S) are due on the 15th day of the 3rd month after tax year-end. They must be filed with the IRS and sent to all partners or shareholders by this date. If needed, businesses can apply for up to a six-month extension using Form 7004. The individuals must then include the information from the Schedule K-1s in their Form 1040s and file by the tax deadline.
Currently, the late filing penalty for Form 1065 is $220 per month (or part of a month) up to a maximum of twelve months for each partner or shareholder on the return. Form 1120-S carries the same late penalty if no tax is due. However, if tax is due, the penalty is even greater.
In addition to the $220 per month per shareholder, the S-corp will also be charged 5% of the unpaid tax for each month the form is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for an 1120-S return that is more than 60 days late is the smaller of the tax due or $43550.
How to check for unfiled 1065s and 1120-Ss in TaxSlayer Pro
Sometime before the upcoming deadline of March 15, 2023, for Partnership (Form 1065) and S Corporation (Form 1120-S) returns, you can run a business “Returns Not Accepted” report, a business “State Returns Not Accepted” report and a business “Electronic Extensions Not Accepted” report in your TaxSlayer Pro software. Each of these reports can identify any returns or extensions of which you have not yet processed an acceptance acknowledgment from the IRS (or state). In essence, they alert you to the need to file an extension for a business entity or correct a return that the IRS has rejected.
To run and print these reports, from the main menu of TaxSlayer Pro select:
4 – Business > 9 – Electronic Filing Menu > 3 – Print Reports > 5 – Returns Not Accepted
At the Returns Not Accepted Menu you will have the following three report options:
1 – Returns Not Accepted Report
3 – State Returns Not Accepted Report
5 – Electronic Extensions Not Accepted Report
Running this report allows you to quickly see whether the IRS has processed and accepted the Schedule K-1s of your business clients, giving you time to correct any oversights before the filing deadline.
For more on Schedule K-1 from TaxSlayer Pro, see our detailed support pages:
- Schedule K-1 (Form 1065) – Overview
- Schedule K-1 (Form 1065) – Heading Information
- Schedule K-1 (Form 1065) – Income (Loss) Items
- Schedule K-1 (Form 1065) – Deductions
- Schedule K-1 (Form 1065) – Self-Employment Earnings (Loss)
- Schedule K-1 (Form 1065) – Credits & Foreign Transaction Items
- Schedule K-1 (Form 1065) – Alternative Minimum Tax (AMT) Items
- Schedule K-1 (Form 1065) – Tax Exempt Income, Non-Deductible Expenses, Distributions & Other Items