TC 246: Partnership and S-Corporation Return Penalty

What the code actually does

TC 246 is a generated transaction on a business account. IRS Document 6209, Section 8A (the IRS’s reference guide to its data-processing codes) describes it as the “failure to provide information penalty on 1065 or 8752, generated when a Form 1065 or 8752 is incomplete,” and adds a second use: “failure by large partnerships to file electronically – identified by Reference No. 688.”

The IRM is more precise, and it is the better authority here. IRM 20.1.2.2.5 lists the code twice, distinguished by the reference number it carries: “TC 246/247 (with penalty reference number 722)” is the “systemic assessment/abatement of the penalty for failure to file (Form 1065, U.S. Return of Partnership Income and Form 1120-S, U.S. Income Tax Return for an S Corporation),” while “TC 246/247 (with penalty reference number 723)” is the “systemic assessment/abatement of the incomplete return penalty” on the same two forms. So the code alone does not tell you what happened; the reference number does.

Three different penalties, one code

Reading the reference number is therefore the first and most important step, because the three penalties call for entirely different work.

Penalty reference number 722 is the failure-to-file penalty under IRC 6698 for partnerships and IRC 6699 for S corporations — a per-partner or per-shareholder amount ($255 for returns required to be filed in 2026) for each month the return is late, capped at 12 months of accrual per return. The argument is about timeliness, and reasonable cause is not the only path: IRM 20.1.1.3.3.2.1, First-Time Abate, names this penalty specifically — “Failure to File (FTF) penalty under IRC 6651(a)(1), IRC 6698(a)(1), or IRC 6699(a)(1)” — so a PRN 722 assessment qualifies for the same First-Time Abate waiver as an individual’s late return, with the extra business-account conditions in IRM 20.1.1.3.3.2.1 ¶(6) (for a return AEP covers that is due on or after January 1, 2027, AEP replaces First-Time Abate), and the Penalty Abatement Analyzer is built to run that analysis: its “Failure to file” option is captioned against IRC §6651(a)(1), §6698(a)(1) and §6699(a)(1) together, not just the individual statute. Check First-Time Abate eligibility and, for a partnership with 10 or fewer partners, whether it meets the conditions of Rev. Proc. 84-35, before building a reasonable-cause case from scratch.

Reference number 723 is the incomplete-return penalty on the same forms, under IRC 6698(a)(2) for partnerships and IRC 6699(a)(2) for S corporations. The return arrived, but something required was missing, and the IRS gives the filer a chance to supply what is missing before the penalty is assessed at all. The argument, where it is still needed, is usually factual: either the information was in fact supplied, or the omission was cured. If a partnership return was both late and incomplete and the IRS abates the PRN 723 penalty, the IRS assesses the PRN 722 late-filing penalty instead (IRM 20.1.2.4), so prepare relief for the late filing (First-Time Abate, Rev. Proc. 84-35 or reasonable cause) at the same time. A PRN 723 assessment is outside First-Time Abate — IRM 20.1.1.3.3.2.1 lists only the failure-to-file variant, IRC 6698(a)(1)/6699(a)(1), so you must argue a PRN 723 assessment on the facts or on reasonable cause. Note also that this number is a penalty reference number and has nothing whatever to do with IRC 6723, the identifying-number provision behind TC 200 — a coincidence of digits that misfiles these codes into the information return chapter with some regularity.

Reference number 688 is the electronic filing requirement for large partnerships. The failure is one of form rather than substance, and the remedy usually turns on whether the partnership was actually within the mandate for that year. Like PRN 723, a PRN 688 assessment is outside First-Time Abate: Treas. Reg. 301.6011-3(c) treats the failure as an IRC 6721 information-return failure, and IRM 20.1.1.3.3.2.1 does not list that penalty.

It applies where there is often no tax at all

The feature that makes this penalty land hard is that a partnership or S corporation generally owes no income tax on the return being penalized. The entity files, income passes through, and the partners or shareholders pay. So a TC 246 can produce a real balance on a module (the record for one tax type and period) carrying no tax liability whatsoever — and because the failure-to-file penalty under IRC 6698 and IRC 6699 is computed per partner or shareholder per month, an entity with a dozen partners and a return several months late can accumulate a figure well out of proportion to anything else on the account.

That has a practical consequence for how the penalty is discovered. There is no unpaid tax to prompt the client’s attention, so the assessment is often first noticed on a transcript rather than in response to a notice, sometimes long after the fact. Confirming the number of partners or shareholders used in the computation is worth doing directly, since the count is an input the entity is better placed to verify than the IRS, and an overstated count overstates the penalty proportionally.

What people mistake TC 246 for

People confuse TC 246 with the information return penalties in IRM 20.1.7, for the reason above — one of its reference numbers is 723 and one of those provisions is IRC 6723. They are unrelated. The information return penalties concern Forms 1099, W-2 and payee statements and run through the Notice 972CG process; this penalty concerns the entity’s own return and is governed by the failure-to-file chapter. Following the wrong chapter leads to the wrong statute, the wrong relief standard and the wrong reply channel.

People also read it as interchangeable with the miscellaneous civil penalty codes, and here the confusion is closer to the mark but still consequential. IRM 20.1.2.2.5 lists “TC 240/241 (with penalty reference number 722)” and the same pair with 723 as the manual assessment and abatement of these identical penalties, noting the manual route applies “only to MFT 06 and 07, and to MFT 02 with return Doc Code 16.” So the same penalty can arrive as a systemic TC 246 or a manual TC 240, and any abatement will post as TC 247 or TC 241 accordingly — the manual/systemic split that runs through this whole family.

What to do next

Read the penalty reference number before anything else, because 722, 723 and 688 are three different penalties with three different defenses.

Do not route the case through the information return penalty chapter, notwithstanding the 723 coincidence — the governing guidance is the failure-to-file chapter.

Verify the partner or shareholder count used in the computation, since the failure-to-file penalty scales with it and the entity can check it directly.

For an incomplete-return assessment, establish whether the information was supplied or has since been cured, which is a factual answer rather than a relief request.

Where the failure is timeliness (PRN 722), check First-Time Abate (for a return AEP covers that is due on or after January 1, 2027, AEP replaces First-Time Abate) before building a reasonable-cause case — the Penalty Abatement Analyzer models both for this penalty — and confirm what was actually assessed with the IRS Transcript Decoder, since a module with no tax on it can still carry a substantial balance.