IRS recently issued a revised Form 5227, Split-Interest Trust Information Return, and instructions for use in preparing 2007 tax year returns. The new form includes a number of changes that will impact charitable remainder trusts (CRTs), charitable lead trusts, and pooled income funds. The three most significant are:

Other changes have been made to the Form 5527.Part I, relating to income and deductions, has been revised, and all trusts are required to complete Sections A through D. Section E and Part II are to be completed only by charitable remainder trusts. Parts III-A and III-B are revised versions of information that had been reported on Form 1041-A.Part V-B has been revised to provide an easier format to compute the required distribution for charitable remainder unitrusts. Schedule A, which is not open to public inspection, expands on the accumulation schedule from the old Form 5527, reflecting distribution information to non-charitable beneficiaries and asking for information about the donor and the assets donated.

We note that starting with the 2007 tax year, if a CRT earned unrelated business taxable income (UBTI) for that year, it is now subject to an excise tax equal to 100 percent of the trust’s UBTI, but the CRT will remain exempt from income tax. As a result, no CRT will be required to file a Form 1041 beginning in 2007.A CRT that has UBTI will file Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code to pay the tax imposed because of the UBTI.

It is important to remind taxpayers who file the Form 5227 to retain proof of mailing the return. From some reports, the IRS has been seeking penalties for failure to file Form 1041-A returns that were due years ago, and frequently the taxpayer does not have proof of mailing. Documentation of mailing can be accomplished by sending the tax return by registered or certified mail (metered by the U.S. Postal Service) or through the use of an IRS approved delivery method provided by an IRS designated private delivery service. With the amount of the penalty for failing to file more than doubling, proof of mailing is that much more important.

Elimination of the Requirement to File Form 1041-A

Section 1201(b) of the Pension Protection Act amended IRC section 6034 in such a way that the IRS is now able to merge Forms 5227 and 1041-A, thereby eliminating the requirement for charitable split-interest trusts — including charitable remainder trusts (CRTs), charitable lead trusts (CLTs), and Pooled Income Funds (PIFs) — to file Form 1041-A.As a result of the merger of the two forms, sections from Form 1041-A related to distributions of income and principal to charitable organizations have been incorporated into Form 5227.

Form 5227 Now Open To Public Inspection

IRC section 6104(b) requires that Form 5227 be open to public inspection. The section also excludes from the public inspection requirement any information related to non-charitable trust beneficiaries. To accomplish this, information related to the non-charitable beneficiaries has been moved to a new Schedule A that is not open to public inspection.

Note that prior to 2007, Form 1041-A was subject to a similar public inspection requirement, although the requirement was not disclosed on the face of the return.

The procedural rules related to public inspection are found at Treas. Reg. section 301.6104(b)-1(d).To inspect a return, the petitioner must submit a written request to the IRS. The written request must include the name of the trust, the trust’s taxpayer identification number, the type of return, and the year for which the trust filed.

We note that as of this writing, the Internal Revenue Manual specifically lists Form 5227 as a form that is not available on CDs or DVDs released to the public (IRM 3.20.12.1.5).

New Penalties Apply

IRC section 6652(c)(2)(C) generally imposes a failure to file penalty on split-interest trusts unless the failure is due to reasonable cause. The penalty is imposed on the trust for failure to:

·         Timely file a return,

·         File a complete return, or

·         Furnish correct information.

The Pension Protection Act altered the penalties assessed for failure to file Form 5227 as follows:

·         The penalty for failure to file is $20 for each day the failure continues with a maximum of $10,000 for any one return. This represents an increase from $10 for each day with a maximum of $5,000 of any one return previously assessed for Form 1041-A.

·         A new “super penalty” has been added for larger charitable split-interest trusts. Such trusts with gross income greater than $250,000 are now subject to a penalty of $100 for each day the failure continues with a maximum of $50,000 for any one return.

·         The IRS may make a written demand that the delinquent return be filed or information be furnished specifying a time to comply with the demand. If the trustee fails to comply with the demand by the specified date, the trustee will be charged a penalty of $10 for each day the failure continues with a maximum of $5,000 for any one return.

·         If the trustee required to file the return knowingly fails to file the return, the same penalty that is imposed on the trust will also be imposed on such trustee. Also, penalties for filing a false or fraudulent return apply.