December 2, 2008

The Honorable Douglas H. Shulman

Commissioner of Internal Revenue

1111 Constitution Avenue, NW, Room 3000

Washington, DC 20224

Re: Proposed Revenue Procedure to Exempt Certain S Corporations from Failure to Timely File Penalty under Section 6699

Dear Commissioner Shulman:

The AICPA is pleased to submit a proposed revenue procedure that is in response to the recent passage of section 6699 of the Internal Revenue Code which imposes a penalty on S corporations for failure to timely-file Form 1120S. The proposed revenue procedure was drafted by our S Corporation Technical Resource Panel and Approved by our Tax Executive Committee.

The penalty imposed by section 6699 may be abated if reasonable cause can be shown.  We are requesting that the Service consider allowing reasonable cause to be deemed automatic if certain requirements are met.  Those requirements include the following:

• The S corporation must be composed of ten or fewer shareholders;
• the S corporation must have no tax liability due at the entity level; and
• all shareholders must have included all items of income, deductions and credits from the S corporation on their own timely-filed personal income tax returns.

Form 1120S is an information return.  We believe its main function is to ensure that the individual shareholders receive the information needed in order to file an accurate and timely personal tax return that includes their pass-through activity.  If the individual shareholders are able to receive this information and report it on their individual returns in a timely manner, that function has been fulfilled, regardless of whether the Form 1120S was filed timely.  In addition, precedence exists for the automatic abatement of late filing penalties for other pass-through entities.  See Revenue Procedure 84-35 (an update to Revenue Procedure 81-11).

In practice, we have seen many reasons for late-filed S corporation returns.  One of the most common reasons is the late receipt of partnership K-1s by S corporations.  Partnerships often issue K-1s on the last day of the extended due date or even later, making it very difficult or impossible for affected S corporations to file on time.  We believe the exception we are proposing would help shorten the Service’s abatement process by reducing the amount of time Service personnel will spend analyzing the requests.  In addition, it would allow the Service to not penalize those individuals who have reported the appropriate information, because, essentially, a penalty on an S corporation is a penalty on the individual shareholders.