“No tax due” doesn’t mean “no penalty”, here’s the gotcha
“No tax due” doesn’t mean “no penalty.” If you run an S corp, that line is the gotcha that bites, especially right now with extension season closing in, September 15 is staring a lot of owners in the face. Here’s the thing: S corporations often owe no entity-level income tax, but the IRS still charges late-filing penalties that are calculated per month or part of a month and then multiplied by the number of shareholders. It’s in the code (IRC §6699), and it’s not hypothetical. It’s mechanical.
So, a simple example. File your Form 1120-S four months late with three shareholders? The IRS counts that as 4 “months” of penalties times 3 shareholders = 12 “months” of penalties. Cap is 12 months per return, by the way, so a full year late with three shareholders can stack up to 36 “months” of penalties. Yes, even if the S corp owes $0 in income tax. The penalty clock cares about the calendar and your shareholder count, not whether there’s tax due.
Speaking of which, timing matters. The 1120-S due date is March 15 (the 15th day of the third month after year-end for calendar-year S corps), with a valid extension pushing filing to September 15. Miss those dates, even by a day into the next month, and you’ve triggered another “month” of penalties. It’s brutal, and it’s very literal. I’ve seen clean, profitable companies with no tax due recieve a penalty stack just because a controller changed jobs and no one hit submit. Happens more than you’d think.
Why am I hammering this in 2025? Because cash is king this year. Financing costs are still higher than the 2020-2021 era, working capital is tighter for a lot of small firms, and every avoidable check to the IRS stings. Anyway, this is exactly why First Time Abate (FTA) matters. Used right, FTA can wipe out an entire late-filing penalty stack for a single tax period if you qualify. That’s real money.
FTA basics (IRS administrative relief): one-time abatement for a single tax period if you’ve had a clean penalty history for the prior three years, filed all required returns, and paid, or arranged to pay, any tax due. It applies to failure-to-file and failure-to-pay penalties. For S corps, that includes the late 1120-S penalty under §6699.
As I mentioned earlier, the penalty math on S corps is weirdly harsh. But that’s why a “first-time slip” can be fixed with one, clean ask, FTA can zero out the whole 36-month pile if that’s what you’ve got. I’ve had clients save five figures with a single phone call and a short letter; honestly, it’s one of the few IRS admin tools that works like it sounds.
- Key takeaway: Penalties accrue per month or part of a month and multiply by the number of shareholders, capped at 12 months.
- Real implication: A 3-shareholder S corp can rack up 36 “months” of penalties in a year, even with no income tax due.
- Why you care in 2025: FTA can erase that stack for a first-time miss, which keeps cash in the business when margins and rates aren’t exactly friendly.
Look, nobody plans to file late. But if it happened, use FTA first; argue later. We’ll show you how to qualify, how to ask the right way, and how to keep your compliance clean so you only need this once.
What First Time Abate actually means in 2025
Here’s the thing: First Time Abate (FTA) is an IRS administrative mulligan for a single tax period, used once per taxpayer, per penalty type, when your compliance has been clean. It’s not a magic wand, but when it fits, it flat-out removes certain penalties without you needing to argue the facts. In plain English, FTA applies to: (1) failure-to-file penalties under IRC §6651(a)(1), (2) failure-to-pay penalties under §6651(a)(2), and (3) failure-to-deposit penalties for payroll taxes under §6656. It does not touch accuracy-related penalties under §6662, negligence, fraud, or information return penalties like late 1099s. If the notice says §6662, FTA isn’t your tool.
For S corps, the most common use is the late Form 1120-S failure-to-file hit under §6699. That’s the nasty one that compounds per shareholder, per month (or part of a month), capped at 12 months. So, a 3-shareholder S corp racking up a full-year delay equals 36 “months” of penalties, exactly why FTA can be such a lifesaver when you only slipped once. I’ve watched owners in real time go from panic to, you know, relief, when the agent says, “We can apply FTA here.”
Eligibility basics (the stuff that trips folks up):
- Clean history: No significant penalties (for the same entity and tax type) in the prior 3 tax years before the period you’re asking to abate. Minor estimated tax penalties don’t usually break eligibility.
- All returns filed: Every return you were supposed to file is on file, corporate, payroll, whatever applies to that entity/EIN.
- Balance handled: Any tax due is paid, or you’re on an approved plan (an installment agreement counts). If you still owe and have no arrangement, FTA can be denied, happens all the time.
- Same entity matters: The 3-year lookback is tied to the same taxpayer, generally, the same EIN for an S corp. A different entity doesn’t “share” your clean history.
Administrative, not factual: FTA is separate from “reasonable cause.” You don’t need to tell the story about the bookkeeper quitting or the software glitch (save that for a reasonable-cause letter if you get denied). Practical strategy: try FTA first, it’s quick and clean, and only if that fails, consider reasonable cause with documentation.
About the dollar amounts in 2025: The per-shareholder, per-month penalty for late 1120-S filing is indexed annually under §6699. The exact 2025 rate is in the current Instructions for Form 1120-S, check that table because it changes year to year and, honestly, I’m still figuring out the IRS’s inflation math half the time. The cap is still 12 months. For payroll penalties (failure-to-deposit), the FTD penalty percentages are tiered by lateness and can stack with interest, but FTA can remove the penalty if you qualify; you’ll still owe the tax and interest on the tax.
Common gotchas in 2025 market reality: With rates elevated and cash tighter, banks aren’t exactly feeling generous this year, some owners delay paying the assessed penalty thinking they’ll “sort it out later.” Don’t. Get an installment agreement if you can’t pay in full; that keeps you eligible. Also, if you had a tiny late-payment penalty two years ago you forgot about, that can blow your “clean” streak. Pull an account transcript before you ask, saves embarrassment and time. And yes, partial months count as full months; file on April 16 and you’ve already tripped month one.
Look, I get it, no one wants to call the IRS. But for a first miss, FTA is exactly what it sounds like: a one-time administrative waiver that can wipe the slate for that period. Use it, then keep your house clean. Anyway, pay the tax, file the return, and check the 1120-S Instructions for this year’s per-shareholder rate before you do the math, penalty math bites when you assume.
Are you eligible? Quick 3-minute checklist
So, before you call the IRS or draft that letter, run this quick screen. It’s pragmatic, it’s fast, and it saves you from that awkward “yeah…you actually don’t qualify” moment. And remember, rates are still high in 2025 and cash is tight for a lot of small shops, so being methodical here keeps you from wasting time you don’t have.
- Clean 3-year history: No late-filing or late-payment penalties for this S corp in the prior three years. A tiny penalty that the IRS system auto-removed doesn’t usually break eligibility, what matters is you don’t have unresolved or assessed penalties sitting on your record for those years. If you’re not sure, pull an Account Transcript for the entity. Look, partial months count as full months under IRC 6699, and they absolutely count; file one day late and you’ve started month one.
- All returns are filed now: Every required entity return is in, including the late Form 1120-S. Extensions only help if they were timely back then, an extension filed after the deadline is not an extension. If you still owe a state filing somewhere (happens a lot with multi-state apportionment), get it off the to-do list; consistency across jurisdictions helps when questions pop up.
- Tax due is handled: S corps rarely owe federal entity-level tax, but it happens, think built-in gains (IRC 1374) or certain recapture items. Any assessed tax is either paid in full or you’re on a formal payment plan (an approved installment agreement counts). Don’t wait, set up the plan; you know, it keeps you in the FTA lane even if cash is tight.
- You recieved a penalty notice: Have the letter in front of you. The late 1120-S penalty notice is commonly CP162. You’ll need the notice date, the tax year, the penalty amount, and the notice/CP number when you call or write. If you have multiple notices, line them up by date because the IRS rep will ask you to confirm details, sometimes twice.
- Entity details match IRS records: The legal name, EIN, tax year, address, and phone/email should match what’s on file. If you changed addresses and didn’t file Form 8822-B, that mismatch can stall abatement requests, basically, it creates silly back-and-forth you don’t need.
Data point to keep you grounded: The IRS Statistics of Income program reported about 5.1 million S corporation returns filed for tax year 2021. You’re not the only one who slips on a deadline, and FTA is built for a first miss. Also, the IRC 6699 penalty accrues by the month (up to 12 months), per shareholder, check the current 1120-S Instructions for this year’s per-shareholder amount, because it changes and it bites.
Speed check (90 seconds): 1) Pull the entity’s Account Transcript for the last 3 years; confirm no penalties stick out. 2) Confirm the 1120-S was filed, it’s in the system or accepted by e-file. 3) If any balance exists, payment posted or an installment agreement is approved. 4) CP162 in hand. 5) Name/EIN/year/contact info match. If all five are “yes,” you’re in good shape to ask for FTA, actually, let me rephrase that, you’re in very good shape.
Speaking of which, if cash is tight this year, and lots of folks are feeling the squeeze with prime still elevated, don’t delay the payment plan. I’ve seen clean cases get derailed because someone waited a month and the account flipped to collection status, and then it’s just, well, slower. Anyway, run this checklist, breathe, and then make the call. And yes, I know I already said to pull the transcript, I’m saying it again because it really does save time, it really does.
How to request FTA for a late 1120-S, phone, letter, or both
So, here’s the playbook I actually use when a CP162 shows up for a late 1120-S. It’s September, phones are busy with the S‑corp extension deadline coming up on September 15, so pick your lane: call first, or go straight to paper if you’re not in the mood to wait. Honestly, I wasn’t sure about this either the first time I did it years ago, and I still keep a sticky note with the steps.
- Call the IRS Business & Specialty Tax Line: 800-829-4933. Have the CP162 in front of you. When you get a rep, say plainly: “I’m requesting First Time Abate on a late-filed Form 1120-S.” Don’t over-explain. They’ll ask for details, give only what’s needed.
- Be ready with:
- EIN
- Tax period (e.g., 12/31/2024)
- Notice number (often CP162) and notice date
- Penalty amounts on the notice
- Return filing date (accepted e-file timestamp or IRS received date)
- Confirmation that the prior three tax years are penalty-free for significant penalties (FTF/FTP/FTD). Small estimated tax penalties under §6654/6655 don’t usually kill eligibility.
- If represented, make sure the IRS can talk to your practitioner. That means a current Form 2848 (POA) on file for the EIN and the specific tax period. If it’s not on file, fax or upload per the rep’s instructions. Don’t assume last year’s POA covers this year, it often doesn’t.
- If phone wait times are rough, mail it. Send a concise letter to the address on the CP162. Say you’re requesting First Time Abate for the 1120‑S late filing penalty, include a copy of the notice, and attach a one-paragraph compliance history statement (e.g., “No significant penalties for 2021-2023, all returns filed, any balance either paid or on installment as of [date].”). Keep it to one page plus attachments, no manifestos.
- Track everything. Write down the rep’s ID, the date/time, and what they promised. If you mailed, calendar a check-in for 6-8 weeks. That’s a normal processing window for a simple FTA request in 2025; I’ve seen quicker, I’ve seen slower. If nothing updates, call back with your notes.
Quick data reality check: First Time Abate has been around since 2001 and applies one time per taxpayer per “module” when you’ve got a clean three-year history. The late filing penalty for S corps is assessed per shareholder per month under IRC §6699. For context, the per‑shareholder monthly amount was $235 for returns required to be filed in 2023 (Rev. Proc. 2022-38) and $245 for returns required to be filed in 2024 (Rev. Proc. 2023-34). I mention that because the math can be shocking, three months late with three shareholders racks up fast.
Tone/tempo tips right now (2025): With rates still high this year and lots of small businesses guarding cash, get any balance into an installment agreement before you call; it keeps the file tidy. And since we’re in September, hold times can spike a bit with extensions about to hit, if you can’t get through by mid-morning, I’d switch to the letter route. This actually reminds me of a case where we thought the rep would reverse it on the spot but, anyway, the mailed request cleared two weeks later. Point is, both paths work.
What to say if the rep hesitates: “We meet FTA criteria, clean 3-year history, all returns filed, and balance addressed. Please consider First Time Abate on the CP162 penalties for the period ending [date].” Be polite but firm. And if they suggest reasonable cause instead, you can, but FTA is usually quicker for a clean account.
Dates and dollars: the penalty math you actually care about
So, here’s the calendar anchor for 2025. If you’re a calendar-year S corp, your 2024 Form 1120-S was due Monday, March 17, 2025 (March 15 landed on a Saturday). A timely Form 7004 extension pushes the filing deadline to Monday, September 15, 2025. Key thing, an extension buys time to file, not to pay. If you had any S-corp level tax (built-in gains tax, LIFO recapture, excess net passive income, that kind of niche stuff), the money was still due by March 17. Interest and any failure-to-pay penalties run from that date, extension or not.
Now the part that stings: late-filing penalties for 1120-S. The penalty is assessed per shareholder, per month (or part of a month) the return is late, capped at 12 months. That “part of a month” catches people, file three days late without an extension, you’ve bought a full month of penalty. That’s exactly why First Time Abate is worth the ask if your history is clean.
How much per month? The IRS adjusts the per-shareholder amount annually for inflation. For tax years beginning in 2024 (i.e., your 2024 calendar-year return filed in 2025), the late-filing penalty amount is $235 per shareholder, per month under IRC §6699, per the 2024 Form 1120-S Instructions. Earlier, for tax years beginning in 2023, it was $220. Rates can change again for 2025, so, you know, always confirm the current-year figure in the 1120-S instructions before you compute exposure.
Quick math: 3 shareholders, filed 2 months late, no extension. Exposure ≈ 2 months × $235 × 3 = $1,410. If it slipped into a third month, even by a day, that jumps to $2,115. Twelve-month cap applies, but you don’t want to test it.
Two clarifiers, because this comes up twice in calls and then it comes up again. First, this penalty is about late filing the 1120-S. If you extended properly and filed by September 15, you avoid it, even if you still owed S-corp level tax, which is a different penalty bucket. Second, the late-filing penalty is separate from failure-to-pay. Failure-to-pay is a percentage of unpaid tax per month (capped at 25%), while the late-filing penalty for S corps is that fixed per-shareholder dollar amount. Different math, different knobs.
Anyway, with rates still elevated this year and cash being guarded, I’d rather compute the worst-case, get any balance into an installment to keep the account tidy, and then ask for FTA. Remember the temporal gotcha: if you missed March 17 without an extension and filed on, say, March 20, you still owe one full month. If you filed April 2, that’s two months. It’s blunt. It’s annoying. But it’s how the code is written, and, honestly, it’s why FTA pays for the phone call.
- Due date: March 17, 2025 (calendar-year 1120-S).
- Extension date: September 15, 2025 (Form 7004; extends filing, not payment).
- Penalty accrual: per shareholder, per month or part thereof, up to 12 months.
- 2024 tax year amount: $235 per shareholder, per month (verify in current 1120-S instructions).
When FTA isn’t enough: reasonable cause, disasters, and appeals
So, if First-Time Abate gets denied because you had another penalty in the prior three years, you’re not dead in the water. The next lane is reasonable cause. The IRS standard (IRM 20.1.1) looks at whether circumstances outside your control caused the miss and whether you exercised ordinary business care. Think serious illness or hospitalization, a key person’s sudden incapacity, records destroyed by fire, flood, or theft, or you were in an area covered by federal disaster relief. Reliance on a tax pro alone usually isn’t enough, United States v. Boyle, 469 U.S. 241 (1985), is still the guidepost here, but it can be part of the story if you can show how you monitored deadlines and why it still slipped.
What actually works? Documentation. The IRS wants facts and dates, not vibes:
- Who was impacted, what happened, and the exact dates (admission records, police/fire reports, insurance claims, evacuation orders).
- What controls you had: calendars, email reminders, your tax organizer sent on X date, confirmations you asked your CPA for, board minutes noting filing responsibilities.
- Why, despite those controls, the return still went out late or the payment wasn’t made.
Quick reminder on dollars, because math tends to focus the mind: for S corps, the late-filing penalty for 2024 tax year returns is $235 per shareholder, per month, up to 12 months (see the 2024 Form 1120-S instructions). One shareholder, two months late? $470. Four shareholders, three months late? $2,820. It stacks fast, especially when rates are still elevated this year and cash is tight.
Now, disasters. Check current IRS disaster relief before you do anything else. Federally declared disasters under IRC 7508A often push filing and payment deadlines and can remove penalties for the affected period if you qualify. The IRS updates the “Tax Relief in Disaster Situations” page with notice numbers and the covered counties. If your records were destroyed or you were under an official evacuation, that’s prime reasonable-cause material. Honestly, I wasn’t sure about this either the first time I ran into it after a client’s storage unit flooded, turns out the FEMA declaration was the ticket, and the penalties were wiped for the covered months.
What if the IRS still says no? Consider a written penalty appeal. The denial letter typically gives a 30-day window from the letter date to send a protest to IRS Appeals. That’s a hard deadline, miss it and you may lose the Appeals route. Keep it tight: restate the facts, the timeline, the controls you had, and attach exhibits. If you’ve already paid, Form 843 can be used to claim a refund/abatement; if not paid, you can still protest based on the notice instructions. And yes, certified mail, every time. I like receipts I can actually touch.
Look, if you expect recurring issues, owner travels abroad every March, late K-1s from upstream partnerships, a complex consolidation, fix the process now. You know how this movie ends otherwise. My quick, unglamorous playbook:
- Calendar layers: firm calendar + owner calendar + shared ops calendar. Redundant on purpose.
- File early: e-file returns and extensions a week before you “need” to. Murphy’s Law has amazing aim.
- Deadline captain: assign one owner or controller as the point person. No diffusion of responsibility.
- Evidence trail: save acknowledgments, extension acceptances, and payment confirmations in one folder.
- Cash plan: if there’s a balance, set up an installment right away to keep penalties/interest contained.
There’s a human side to this too. Stuff happens, people get sick, storms hit, advisors miss a cue. The IRS will listen if you give them a clear, documented story that shows you acted with ordinary business care and the failure was still unavoidable. Will they always say yes? No. But a well-supported reasonable-cause request or a timely appeal moves the odds, and that’s really all we can control.. but that’s just my take on it.
Make this the only time you need it
Here’s the thing, use First-Time Abatement once, then treat your record like it’s your company’s credit score. The IRS’s FTA policy (IRM 20.1.1.3.3.2.1) is a one-time mulligan for a clean filer: you generally qualify if you had no significant penalties in the prior three tax years, all required returns are filed (or validly extended), and any tax due is paid or in an installment plan. Use it once, then lock in good habits so you don’t have to ask again in 2028. I’ve seen too many folks burn FTA on something small, then wish they’d saved it for a real miss, don’t do that.
To make this year’s headache a non-event next year, do the boring stuff ruthlessly:
- Calendar the March gauntlet: set recurring reminders for 60/30/10 days before the mid-March due date (March 15 for calendar-year 1120-S/1065). Add owners and your CPA to the invites. Redundant on purpose.
- E-file early: send returns and extensions a week before you “need” to. Systems hiccup, signatures lag, portals time out. Murphy’s Law has incredible aim.
- Use Form 7004 on day one if you’re not 100%: a timely 7004 gives an automatic 6-month extension for 1120-S and 1065, no fee, just file it by the original due date. It’s free insurance. You still need to pay any expected balance, but the late-file penalty risk drops to near-zero.
- Keep shareholder counts current: under IRC §6699, the late-file penalty for S corps is assessed per shareholder per month (for up to 12 months). Every added owner multiplies exposure. Update your cap table and the IRS/secretary of state records promptly.
- Standardize K-1 workflows: build a checklist so K‑1s go out immediately after acceptance. Owners can’t finish personal returns in Q1 if they’re waiting on you. If you’ve ever watched a partner try to file without a K‑1… yeah, don’t.
- Cash tight? Prioritize avoiding late-file penalties; they’re pure dead money. Put the due dates in a shared calendar, file/extend on time, then manage payments with an installment if needed. With rates still elevated in 2025, carrying balances already costs enough, don’t layer avoidable penalties on top.
Quick reality check: S corp and partnership late-file penalties accrue by the month, even if you’re only a few days late. Extensions stop that clock if timely. Use them.
Look, I get it, this sounds simple on paper and messy in real life. Owners travel, bookkeepers quit right before busy season, banks delay statements. Actually, let me rephrase that: it is messy, which is why you build a default system that catches the misses before they become penalties. Assign one “deadline captain,” keep an evidence trail (IRS acknowledgments, 7004 acceptance, payment confirmations), and review the calendar the first business day of January. This actually reminds me of a client last year who avoided five figures in per-owner penalties just by filing a 7004 while they finished a late audit, nothing heroic, just good habits.
Two final notes, and I know this might be getting complicated: if you used FTA this year, mark a big reminder three years out so you know when you’re “clean” again; and if you ever do slip, pair a timely extension with a reasonable-cause letter supported by timestamps and emails. You won’t win every time, but you’ll move the odds. And honestly, that’s the whole game.
Frequently Asked Questions
Q: Should I worry about a late-filing penalty if my S corp owes $0?
A: Yes. The $0 tax due doesn’t protect you. Under IRC §6699, the IRS charges a late-filing penalty per month (or part of a month) multiplied by the number of shareholders, capped at 12 months per return. So even profitable S corps with no entity-level tax can rack up a real bill. Practical move: file ASAP to stop the month counter, consider First Time Abate (FTA) if you qualify, and if cash is tight, call the IRS to set up a payment plan while you request abatement. Paying the penalty now can reduce interest, and if it’s abated later, you’ll get a refund.
Q: How do I use First Time Abate to get rid of my late 1120-S penalty?
A: Here’s the thing: FTA can wipe an entire late-filing penalty stack for a single period if you have a clean compliance history. Action steps I use with clients: 1) Confirm eligibility: no significant penalties for the prior 3 years, all required returns filed, and any tax due paid or on a plan. 2) Gather facts: return year, number of shareholders, filing date, due date (Mar 15 for calendar-year S corps) or extended due date (Sep 15). 3) Call the IRS Business & Specialty Tax Line at 800-829-4933 and request FTA on the IRC §6699 penalty; note the agent’s name and ID. 4) If phone relief isn’t granted, mail a brief FTA request letter to the address on your notice referencing the notice number and tax year. Tip: this year, missing September 15 by even one day is another “month,” so act before the clock flips.
Q: What’s the difference between filing one day late and one month late on an 1120-S penalty?
A: For this penalty, there isn’t much of a difference, one day into the next month counts as another full month. The penalty is mechanical: months late × number of shareholders (with a 12-month cap per return). Example from the article’s setup: 4 months late with 3 shareholders = 12 “months” of penalties, even if tax due is $0. For calendar-year S corps, the due date is March 15, or September 15 with a valid extension. Miss Sep 15 by a day, and you’ve triggered another month. Brutal, very literal.
Q: Is it better to use FTA now or save it for a bigger mistake later?
A: So, strategically: FTA is generally once per penalty type within a 3-year clean-history window. If the current §6699 hit is meaningful, multiple shareholders, several “months”, I’d use FTA now, especially with 2025 cash being tight for a lot of small firms. If the penalty is tiny and you expect a higher-risk year coming, you could consider saving it, but that’s a gamble. Alternatives if you’ve used FTA already: a reasonable-cause letter (document illness, records lost, key employee turnover, disaster, etc.) or check for IRS disaster relief that may automatically remove penalties. Preventive moves: e-file Form 7004 extension on time, calendar Mar 15/Sep 15 reminders with a 10-day buffer, get e-file acceptances, and have a backup signer so you don’t, you know, miss submit because someone changed jobs and the notice arrives before you even recieve the login.
@article{late-1120-s-use-first-time-penalty-abatement,
title = {Late 1120-S? Use First-Time Penalty Abatement},
author = {Beeri Sparks},
year = {2025},
journal = {Bankpointe},
url = {https://bankpointe.com/articles/first-time-penalty-1120-s/}
} 