What Is a CP162 Notice?

A CP162 is a penalty assessment notice from the Internal Revenue Service issued to partnerships, S-corporations, and certain other pass-through business entities that filed their federal information return after the applicable due date. The notice informs the entity that a failure-to-file penalty has been assessed and specifies the amount owed based on the number of partners or shareholders and the number of months the return was delinquent.

The notice arrives on IRS letterhead addressed to the entity at its registered address. It will include the entity name, Employer Identification Number (EIN), the tax year for which the return was filed late, the number of partners or shareholders used in the penalty calculation, the number of months of delinquency, the per-unit per-month penalty rate, and the resulting total penalty.

The most important thing to understand about the CP162 before doing anything else is this: the failure-to-file penalty for partnerships and S-corporations is not calculated as a percentage of tax owed. It is a flat dollar amount per partner or shareholder per month. This means the penalty applies in full even when the partnership or S-corporation has zero tax liability at the entity level — and it can become very large very quickly for entities with many partners or a significant delay in filing.

Why Did You Receive a CP162?

A CP162 is issued whenever a required partnership or S-corporation return is filed after the applicable deadline without an approved extension, or after the extension deadline.

For calendar-year entities, the original due date for both partnership returns (Form 1065) and S-corporation returns (Form 1120-S) is March 15. If a timely extension is filed, the extended deadline is September 15. Filing after either deadline without an approved extension triggers the failure-to-file penalty.

Extension must be timely. Many entities assume they can file an extension at any point to avoid the penalty. This is incorrect. An extension must be filed by the original due date — March 15 for calendar-year entities. An extension filed on March 20 for a calendar-year entity that already missed the March 15 deadline does not retroactively extend the due date.

The filing obligation exists regardless of activity. A partnership or S-corporation that had no transactions, no income, and no activity during the tax year is still required to file an information return for that year. The failure-to-file penalty applies to a zero-activity entity the same as to an active one.

Fiscal year entities. For partnerships and S-corporations with fiscal years that do not end December 31, the due date is the 15th day of the third month after the entity's fiscal year end. A fiscal year entity with a June 30 year-end has a September 15 due date. The same extension rules apply.

How the CP162 Penalty Is Calculated

The failure-to-file penalty rate for partnerships and S-corporations is set by the IRS and adjusted for inflation periodically. For recent tax years, the rate has been $245 per partner or shareholder per month (for 2023 returns) with adjustments in subsequent years.

The maximum penalty period is 12 months. The penalty calculation is:

[Number of partners/shareholders] × [Months late] × [Per-month rate] = Total penalty

Some examples illustrating how the penalty scales:

A two-person LLC taxed as a partnership that filed 3 months late: 2 × 3 × $245 = $1,470

An S-corporation with 8 shareholders that filed 6 months late: 8 × 6 × $245 = $11,760

A partnership with 20 partners that filed the maximum 12 months late: 20 × 12 × $245 = $58,800

These are not hypothetical extremes. Entities with significant numbers of partners or shareholders that allow returns to go unfiled for extended periods can face penalty amounts that dwarf any tax liability that would have been owed. The CP162 penalty is one of the most disproportionate penalties in the IRS code relative to the harm caused by the underlying failure.

What Is Physically on the CP162?

The CP162 will contain the entity name and EIN, the specific tax year for which the return was filed late, the number of partners or shareholders used in the calculation, the number of months the return was considered late, the per-partner per-month penalty rate applied, and the total penalty amount.

It will also include payment instructions and a deadline — typically 21 days from the notice date before additional interest begins accruing on the unpaid penalty.

Verifying the Penalty Calculation

Before responding to or paying the CP162, verify that the IRS used the correct number of partners or shareholders. The penalty is based on the number of partners or shareholders who held interests in the entity during the tax year — not the current number. If the IRS used the wrong count, the penalty calculation is incorrect.

Documentation supporting the correct partner or shareholder count includes the entity's operating agreement or shareholders' agreement showing ownership during the relevant year, the Schedule K-1 list from the filed return, state-filed entity records, and ownership transfer or buy-sell documentation if ownership changed during the year.

Also verify the number of months the IRS considers the return late. The IRS counts from the original due date (or extended due date if an extension was timely filed) through the date the return was actually received. If the return was filed by mail, the date of mailing — with proof — establishes the filing date. If the return was filed electronically, the transmission date is the filing date.

Can the CP162 Penalty Be Abated or Reduced?

Yes — and in many cases the penalty can be eliminated entirely. Penalty abatement is available through two primary mechanisms:

First-Time Penalty Abatement (FTA). The most commonly granted and most straightforward abatement. If the entity has not had a similar failure-to-file penalty for the prior three tax years — meaning the three years preceding the year at issue show no assessed failure-to-file penalties — the IRS will grant FTA upon request. No documentation is required. No explanation of why the return was late is necessary. The abatement is granted based solely on the entity's prior compliance history.

The FTA request can be made by phone — calling the IRS at the number on the notice — or in writing. Simply reference "First-Time Penalty Abatement" and confirm the entity's clean compliance history for the prior three years. If granted, the entire penalty is eliminated.

Reasonable Cause Abatement. If the entity does not qualify for FTA (because it had a similar penalty in the prior three years, or for other reasons), a reasonable cause argument can be made. Reasonable cause exists when the failure to timely file was attributable to circumstances beyond the entity's control and the entity acted reasonably and in good faith given those circumstances.

Accepted reasonable cause arguments include: serious illness or death of the partner or officer responsible for filing, particularly when there was no one else able to step in; destruction of the entity's records by fire, flood, or natural disaster; reasonable reliance on erroneous advice from a tax professional or the IRS itself; or other extraordinary circumstances. Convenience, cash flow problems, or simply forgetting the deadline do not constitute reasonable cause.

The reasonable cause request must be submitted in writing with documentation supporting the claimed circumstances.

What Happens If the CP162 Is Not Paid and Not Disputed?

The penalty balance on the CP162 becomes part of the entity's overall tax balance with the IRS. Interest begins accruing on the unpaid penalty from the due date. The IRS will send escalating collection notices. Eventually, if the balance remains unpaid, the IRS can file a Notice of Federal Tax Lien against the entity, levy the entity's bank accounts and receivables, and in some cases pursue collection from the entity's partners through partnership liability rules.

For S-corporations, the shareholders generally are not personally liable for the CP162 penalty itself (as opposed to employment taxes, where the TFRP risk exists). For general partnerships, partners may have personal liability under state partnership law for the entity's tax obligations.

Who Receives CP162 Most Often?

Small partnerships and S-corporations with informal accounting. Entities that rely on individual partners or shareholders to manage filing obligations without formal accounting staff are the most frequent CP162 recipients. When the responsible party is busy, ill, or simply forgets, the return gets filed late.

Entities formed late in the year. An entity formed in October or November may not realize its first return is due the following March — only four to five months after formation — and misses the first deadline.

Entities that assumed zero activity meant no filing. The most common misconception leading to CP162 is the belief that a partnership or S-corporation with no activity during the year does not need to file. The filing obligation exists regardless of activity level.

Entities going through ownership changes or dissolution. When partners or shareholders are in the process of exiting, selling, or winding up the entity, filing the final return can fall through the cracks during the transition.

Related IRS Notices

Frequently Asked Questions

Does the CP162 penalty apply even if the entity owes no tax?

Yes. This is the aspect of the CP162 penalty that surprises most recipients. The failure-to-file penalty for partnerships and S-corporations is entirely independent of any tax liability at the entity level. An entity with zero income, zero expenses, and zero tax due for the year still owes the full per-partner penalty if the information return is filed late.

What if the number of partners shown on the CP162 is incorrect?

If the IRS used the wrong number of partners or shareholders — for example, if it used the current number rather than the number who held interests during the tax year, or if a partner was inadvertently counted twice — the penalty is overstated. Respond in writing to the notice with documentation showing the correct partner count and request that the penalty be recalculated.

Can I pay the penalty and then request abatement?

Yes. Paying the penalty stops interest from accruing on it, and you can simultaneously request abatement. If abatement is granted, the IRS will refund the amount paid. Some practitioners recommend paying first to stop the interest clock and then requesting abatement, particularly if the abatement is likely to be granted and the IRS's processing time is significant.

What qualifies as First-Time Penalty Abatement for CP162?

FTA for CP162 requires that the entity had no assessed failure-to-file penalties for the same return type in the three tax years preceding the year at issue. The three-year lookback is the key criterion. If the entity is new and has no prior penalty history, it typically qualifies. If the entity has had prior late filings with penalties, it may not qualify for the most recent year's penalty.

What if the extension was filed but the return was still filed late?

If you have documentation showing the extension was timely filed, the penalty should only apply to the period between the extended deadline and the actual filing date — not from the original due date. Respond to the CP162 with a copy of the accepted extension to request that the penalty be recalculated from the extended deadline.

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