How to Resolve an IRS CP162 Notice (Late Form 1065 / 1120-S)

Opening mail from the IRS is never pleasant, but receiving a CP162 Notice can induce immediate panic for business owners. This specific notice is issued to pass-through entities—primarily Partnerships (Form 1065) and S-Corporations (Form 1120-S)—when the IRS assesses severe penalties for filing infractions.

The Difference Between CP162A and CP162B

To fight the penalty, you first need to understand why it was issued. The IRS categorizes this notice into two distinct variations:

• CP162A Notice: This is issued when your return was filed late. If you missed the March 15 deadline (or the extended September 15 deadline), the IRS automated system triggers this notice the moment your late return is processed.
• CP162B Notice: This is issued when your return was filed on time, but it was deemed incomplete, or it was filed on paper when electronic filing was strictly mandated. The IRS treats a drastically incomplete return as if it was never filed at all.

Statutory Penalty Calculations (IRC §6698)

Under Internal Revenue Code §6698, the failure to file a timely and complete partnership or S-Corp return carries an aggressive, compounding penalty. For the 2026 tax season, the penalty is assessed at $255 per partner (or shareholder), per month, for up to 12 consecutive months.

How to Abate a CP162 Notice Penalty

Paying a massive penalty is not your only option. There are three primary pathways to achieve penalty forgiveness, provided you act quickly:

• Rev. Proc. 84-35 (Small Partnership Exception): If your partnership has 10 or fewer partners, all partners are domestic individuals, and every partner reported their share of the income on their personal, timely-filed tax returns, you can request full abatement under this revenue procedure.
• Reasonable Cause (IRC §6651): If the delay was caused by circumstances entirely out of your control—such as the destruction of records, a major natural disaster, or severe illness of the primary accountant—you can submit a written defense proving you exercised ordinary business care and prudence.
• Automatic Exemption from Penalty (AEP): For entities with a flawless compliance history over the past three tax years, the IRS is phasing in the AEP program (replacing the legacy First-Time Abatement or FTA). You can request this administrative waiver directly over the phone or via written correspondence to wipe out the CP162 penalty for a single tax year.