Solved: Is the managing member of an LLC responsible for tax penalties assessed directly to the LLC?
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Is the managing member of an LLC responsible for tax penalties assessed directly to the LLC?

I am the managing member of a two-member LLC filing on a 1065. I received a notice under the LLC name of late filing for a previous year's tax return along with a failure-to-file penalty.

At this time, it doesn't appear that the penalties have been transferred to my personal tax liability.

Am I personally responsible for penalties imposed on the LLC? If so, should I try to reduce them through OIC, FTA or reasonable cause?

1 Best answer

Accepted Solutions
Level 10

Is the managing member of an LLC responsible for tax penalties assessed directly to the LLC?

This will be difficult to address in a forum such as this, however, I will provide some overview commentary:

  • When an LLC is organized the LLC should have an operating agreement.  The operating agreement will provide some general information that is applicable for most LLC's, however, it should also contain specific language and discussion on matters such as; allocations and responsibilities of the members and managing member(s).
  • In general, a managing member operates like a general manager of a company; running the day to day operations. Most of the time a managing member operates much like a general partner of a partnership in that they usually are the person that keeps the other members informed of tax matters (and as such, are usually the tax matters partner designee).
  • Having said that, whether the managing member has the burden of these penalties will be dictated by:
    • the statute of the state in which it was organized
    • the relationship of the members
  • The LLC received the notice and the LLC is responsible for paying this notice, not any specific member.
  • Now if the other members believe that this was the fault of the managing member and this person decides to reimburse the cost of these penalties, then this individual would just reimburse the LLC.  The original entry would be to DR. Penalty expense CR. Cash the the reimbursement would be DR. Cash and CR. Penalty expense.  These two entries would wash and no impact on the LLC books and records.
  • What I would recommend is that you draft a letter to the IRS with the facts as to why it was late, indicate that this was your first offense and that it will not be a recurring issue and ask that the penalties be abated.  Send the letter certified mail return receipt requested 
*A reminder that posts in a forum such as this do not constitute tax advice.*

View solution in original post

1 Reply
Level 10

Is the managing member of an LLC responsible for tax penalties assessed directly to the LLC?

This will be difficult to address in a forum such as this, however, I will provide some overview commentary:

  • When an LLC is organized the LLC should have an operating agreement.  The operating agreement will provide some general information that is applicable for most LLC's, however, it should also contain specific language and discussion on matters such as; allocations and responsibilities of the members and managing member(s).
  • In general, a managing member operates like a general manager of a company; running the day to day operations. Most of the time a managing member operates much like a general partner of a partnership in that they usually are the person that keeps the other members informed of tax matters (and as such, are usually the tax matters partner designee).
  • Having said that, whether the managing member has the burden of these penalties will be dictated by:
    • the statute of the state in which it was organized
    • the relationship of the members
  • The LLC received the notice and the LLC is responsible for paying this notice, not any specific member.
  • Now if the other members believe that this was the fault of the managing member and this person decides to reimburse the cost of these penalties, then this individual would just reimburse the LLC.  The original entry would be to DR. Penalty expense CR. Cash the the reimbursement would be DR. Cash and CR. Penalty expense.  These two entries would wash and no impact on the LLC books and records.
  • What I would recommend is that you draft a letter to the IRS with the facts as to why it was late, indicate that this was your first offense and that it will not be a recurring issue and ask that the penalties be abated.  Send the letter certified mail return receipt requested 
*A reminder that posts in a forum such as this do not constitute tax advice.*

View solution in original post

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