IRS Notice CP162A: What To Do About S Corp and Partnership Penalties

IRS Notice CP162A is the notice the IRS sends when it assesses a late filing penalty — also known as the failure-to-file penalty — against a passthrough entity, such as an S corporation or partnership, for filing their Form 1120S or Form 1065 late.

Here is a redacted Notice CP162A that the IRS sent to one of our S corporation clients.

IRS Notice CP162A At a Glance

How Is the Late Filing Penalty Calculated?

While the late filing penalty for taxpaying entities such as individuals and C corporations is based on the balance due per the return, the late filing penalty for passthrough entities such as S corporations or partnerships is based on the number of owners the business had during the year — essentially, the number of Schedule K-1s the passthrough entity filed along with the return (Form 1120S for S corporations or Form 1065 for partnerships).

The penalty is a certain statutory amount for the year — currently $235 — multiplied by the number of months the return was late (up to 12 months), multiplied by the number of owners the business had during the year.

The chart below shows the monthly statutory penalty amount per owner for the years 2015-2024.

IRS Notice CP162A Explained, Part by Part

Here is a full explanation of the Notice CP162A, part by part.

Part 1: Balance Due

The words at the top provide you with the purpose of this notice in a nutshell: to inform you that the IRS charged your passthrough entity (in this example notice, a client’s S corporation) a failure-to-file penalty.

In the large bold text, the notice informs you of the amount of the penalty charged — in this case, $2,640.

The summary box essentially repeats this information.

Part 2: Payment Coupon

Next, the IRS will provide you with a payment coupon for the full amount of the penalty.

The IRS wants you to pay them in full with the coupon. Obviously, it’s trying to make things as easy as possible for you to pay them by providing you with this coupon.

Now, you can simply pay the penalty and be done with it — though it may be in your best interest to fight it (more on that later).

If you do simply want to pay by check submitted along with the payment coupon, be sure to include this information on the memo line of the check:

• EIN
• Tax period
• Form number

You’ll mail the form to the address on the coupon.

Part 3: What the IRS Says You Need to Do 

Then, the IRS will tell you what you “need” to do after receiving the notice.

Here, it’ll remind you of your balance, that you should pay it before a certain date in the future to avoid additional interest charges, and how you can pay it.

If you can’t pay the penalty you owe in full, the IRS has additional options you can apply for, such as:

• An installment agreement to pay off your penalty in monthly payments
• An offer in Compromise (OIC) to settle your debt for less than you owe
• A temporary collection hold

Lastly, if you disagree with the balance, call the IRS and have them review your account at the provided number.

Part 4: If The IRS Doesn’t Hear From You

Then, the IRS will tell you what it will do if you simply don’t do anything in response to this notice — it will assume you agree with the information in the notice and will proceed under that assumption.

Part 5: Penalties Breakdown

The IRS will then provide you and your business with a breakdown of the penalty (or penalties) you’ve received.

First, there will be a penalty breakdown table showing you how the penalty amount was calculated under this formula:

Number of Shareholders During the Year
x
Statutory Amount Per Shareholder
x
Number of Months the Return Was Late (Maximum 12)
=
Penalty Amount

If you and/or your partner(s) cannot pay all the penalties outstanding, the IRS does provide some options for penalty relief. If you contact them about specific penalties with an adequate case and documentation of reasonable cause for filing your Form 1120S or Form 1065 late, they should reconsider and review your case.

Finally, if the IRS provided written advice and you followed it but were still penalized, you may be eligible for penalty removal.  Penalties given because of the erroneous IRS advice aren’t necessarily valid and can be disputed. Here are the four criteria you must meet in order to qualify for penalty abatement due to erroneous written advice from the IRS:

• You wrote to the IRS asking for written advice on a specific issue.
• You gave the IRS adequate and accurate information.
• You received written advice from the IRS.
• You reasonably relied on the IRS’s written advice and were penalized based on that advice.

If one or more of these are true, then you can qualify for the removal of your penalties.

Part 6: Additional Information

Lastly, the IRS will wrap up your CP162A Notice with some additional information. They will provide you with a link to their website to provide some more information about their notice. To make things easier for you, we’ve linked that here.

We advise you to review your taxpayer rights and other publications to stay informed and up to date. Don’t forget that the IRS will also answer your questions if you call their provided number, so don’t be afraid to use that resource.

What You Should Do If You Receive a CP162A

Below are steps for you to take after you receive a CP162A Notice from the IRS.

Step 1: Confirm You Actually Owe The IRS

While it may sound obvious, double-check that you owe the IRS money. The IRS can and does make mistakes from time to time, and it’s up to you to protect yourself and your business by staying vigilant.

The IRS is claiming you didn’t file your return on time. Is that true? Did you file, and they just failed to receive it or make a note of it?

The IRS is saying you owe them money in penalty fees. Is that true? Did they give you advice in writing but charge you anyway?

We cannot stress this enough. Always double-check your CP162A Notices. Check your penalties and the legitimacy of their claims.

Step 1a: Dispute the Charges if the IRS is Wrong

If you found an irrefutable error in your CP162A Notice, then contact the IRS at the provided phone number. It’s important to do this sooner rather than later, especially since the IRS will take any lack of response to the notice and acceptance, and compliance.

Unfortunately, you’ll probably have to call the IRS multiple times and tell the same story over and over. The likelihood of the IRS resolving everything for you in one phone call is unlikely and shouldn’t be expected of them.

Since the process is difficult and annoying, we provide this service to all our clients. It’s your right as a taxpayer to pursue the amendments to your bill, and it will probably save you a lot of money.

Step 2: If You Can Pay In Full, Do So

You will have about 20 days from the date of the notice to pay off your balance, or else the IRS will take further action.

Again, if there are grounds to dispute the IRS, we strongly advise you to do so as soon as possible.

However, if you can pay off your penalty in full, do so. It is the fastest way to clear your name with the IRS and will halt any new penalties from appearing.

Step 3: Seek Penalty Abatement From the IRS

For those who cannot pay, penalty abatement is a valid option. Penalty abatement allows you to appeal the charges the IRS has against your account to possibly remove or reduce what you owe. It’s highly effective if you qualify.

While it’s not a guaranteed solution since not everyone qualifies, it never hurts to check.

If this is your first time incurring the failure-to-file or failure-to-pay penalty for your S corporation or partnership, you may qualify for one-time forgiveness.

Choice Tax Relief will always attempt to seek some penalty abatement for our clients.

Step 4: Seek Tax Relief

If you’ve done everything possible to plead your case with the IRS and still can’t afford your balance, consider seeking tax relief.

The IRS is usually willing to set up some sort of payment plan to allow you to pay it back over a longer stretch of time and alleviate the tax burden on your business.

Another option is known as an offer in compromise (OIC). If the IRS accepts your offer, you will be able to settle your tax debt for less than you owe. It’s an effective and highly desirable solution if you and your business qualify.

Since an OIC isn’t a feasible option for everyone, the IRS provides other alternatives. Things like the previously mentioned installment payments are highly effective, alongside temporary hardship placements (called currently not collectible status).

A “not collectible status” will prevent the IRS from taking action against you and your account for a predetermined amount of time. It won’t make the penalty go away, but it’ll give you some time to save and prepare to pay it off.

Author:

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Logan Allec, CPA, Founder and Owner

Logan Allec has been serving taxpayers as a CPA for over 14 years. After leaving his role at a "Big 4" firm, he started Choice Tax Relief to help everyday Americans who have found themselves behind on their taxes. He also educates thousands of people daily about tax relief on his YouTube channel. In addition to his CPA license, Logan also has a Master's Degree in Taxation from the University of Southern California (USC). He lives with his wife and children in the Los Angeles area. Learn more about Logan here.

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