I filed 1065 Partnership Return for 2011 for a California LLC and checked the "technical termination" box and business had no further activity. I forgot to file the Certificate of Cancellation (Form LLC–4/7) with Secretary of State until 2012. Now the IRS sent me a letter asking for 2012 Tax Return.

Should I write a letter back stating that it was terminated in 2011 and they should refer to 2011 tax form, or should I file a 2012 tax return with the "technical termination" box checked again (maybe with a note of explanation)?

I fear they're going to hit me with penalties and late fees... Any solution to avoid this? Thanks!

You are correct to be concerned about the late filing penalties.

Call the IRS at the phone number on the notice and explain the situation, then ask for guidance was to what to do. It is possible the IRS will not ask for another partnership return if there was no business activity.