New Split-Interest Return Form

The IRS recently issued a revised Form 5227, Split-Interest Trust Information Return, for use in preparing returns for tax years beginning on or after Jan. 1, 2007. Among its numerous changes, the most significant are:

• Charitable split-interest trusts are no longer required to file Form 1041-A, Trust Accumulation of Charitable Amounts, sections of which are now incorporated in Form 5227.
• Form 5227 is now open to public inspection.
• Failure to file or late filing subjects trusts and/or trustees to new penalties and higher existing ones.

The Pension Protection Act amended IRC § 6034 to allow the IRS to merge forms 5227 and 1041-A for charitable remainder trusts, charitable lead trusts and pooled income funds. Sections of Form 1041-A related to distributions of income and principal to charitable organizations are now incorporated into Form 5227.

IRC § 6104(b) now requires that Form 5227 be open to public inspection, except for information related to noncharitable trust beneficiaries, which has been moved to a new Schedule A that is not open to public inspection. Note that Form 1041-A also 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. § 301.6104(b)-1(d). To inspect a return, the petitioner must submit a written request to the IRS that must include the name of the trust, the trustee’s address, the type of return and the year for which the return was filed.

IRC § 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 to furnish correct information. The Pension Protection Act altered the penalties 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 the penalty previously assessed for Form 1041-A of $10 for each day, with a maximum of $5,000 for any one return.
• 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 with a deadline for filing the delinquent return or furnishing information. If the trustee fails to comply 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 do so, 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.

Prepared by Ted Batson, CPA, MBA, CFP, executive vice president, Renaissance, Indianapolis, and member of the AICPA Trust Accounting Income Task Force.