JCT Recommends Form 5227 Penalties

JCT Recommends Form 5227 Penalties

News story posted in Legislative on 26 July 1999| comments
audience: National Publication | last updated: 18 May 2011
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Summary

The Joint Committee on Taxation ("JCT") has released a study (JCS-3-99) which recognizes that the failure to file penalty arguably does not apply to a Form 5227. JCT recommends assuring imposition of a penalty for failure to file Form 5227 and possible increasing that penalty.

PGDC SUMMARY:

The Joint Committee on Taxation ("JCT") has released a study (JCS-3-99) which recognizes that while section 6034 of the Code grants the Secretary the authority to require the filing of information returns by certain trusts, Form 5227 is required by the Regulations under section 6011 of the Code. Therefore, the penalties imposed under section 6652(c)(2) arguably do not apply to a trust's failure to file Form 5227. In addition, the study noted that Congress had increased the penalties applicable to exempt organizations for failure to file annual returns in 1996, but had not increased the penalties imposed by section 6652(c)(2)(A) on trusts that failed to file a return required by section 6034 of the Code. In response to this, JCT, in part, recommends that (i) the penalty imposed under section 6652(c)(2)(A) of the Code apply to a charitable remainder trust's or charitable lead trust's failure to file Form 5227 and that said penalty amount be increased to the amounts imposed by section 6652(c)(2)(A) of the Code for failure by a tax-exempt organization to file Form 990 or 990-PF, and (ii) Congress consider whether it is appropriate to increase the penalty imposed under section 6652(c)(2)(A) for failure to file returns required under section 6034 generally.

PARTIAL TEXT:

I. Tax Exempt Organizations -- Clarify and Increase Penalty for

Failure to File Annual Information Returns for

Charitable Remainder Trusts



Present Law

Tax-exempt organizations (other than churches and certain small organizations) are required to file an annual information return, Form 990 (Form 990-PF for private foundations), with the Internal Revenue Service (" IRS"), and are subject to a penalty for failure to file such returns equal to $20 for each day the failure to file continues, not to exceed the lesser of $10,000 or 5 percent of the organization's gross receipts (sec. 6033 and sec. 6652(c)(1)(A)). In the case of tax-exempt organizations with gross receipts in excess of $1 million for any year, the penalty is increased to $100 per day, not to exceed $50,000. Split-interest trusts (described in sec. 4947(a)(2)) and certain trusts claiming charitable deductions under section 642(c) also are required to file an annual information return, Form 1041-A (sec. 6034). The penalty for failure to file Form 1041-A is $10 for each day the failure continues, up to a maximum of $5,000 with respect to any one return (sec. 6652(c)(2)(A)). Split- interest trusts, including charitable remainder trusts described in section 664, generally are required to file an additional annual information return, Form 5227, which provides more information than reported on Form 1041-A regarding the trust's financial activities and whether the trust is subject to certain excise taxes imposed under chapter 42 (Treas. Reg. sec. 53.6011-1(d)). /390/

The penalty imposed under section 6652(c)(2)(A) for failure to file annual trust information returns refers only to "a return required under section 6034." Section 6034 grants the Secretary of the Treasury authority to require the filing of information returns by split-interest trusts and certain other trusts; however, because Form 5227 is required by regulation under section 6011 rather than section 6034, the penalties imposed under section 6652(c)(2) arguably do not apply to a trust's failure to file Form 5227.

In 1996, Congress increased the penalties applicable to exempt organizations for failure to file annual returns in order to provide a greater incentive to organizations to comply with the filing requirements imposed by section 6033. The penalty imposed by section 6652(c)(2)(A) on trusts that fail to file a return required by section 6034 was not increased.

Recommendation

The Joint Committee staff recommends that the penalty imposed under section 6652(c)(2)(A) be clarified to apply to a trust's failure to file Form 5227. In addition, the Joint Committee staff recommends that the penalty imposed under section 6652(c)(2)(A), as applied to a trust's failure to file Form 5227, be increased to the penalty amounts imposed by section 6652(c)(1)(A) for failure by a tax-exempt organization to file Form 990 or 990-PF, and that Congress consider whether it is appropriate to increase the penalty imposed under Section 6652(c)(2)(A) for failure to file returns required under section 6034 generally.

Analysis

Form 5227 is critical to the enforcement efforts of the IRS as it provides detailed information regarding the financial activities of split-interest trusts and possible liability for the private foundation excise taxes to which these trusts are subject. Increasing the penalty imposed on trusts that fail to file required information returns and ensuring that all relevant returns are covered by such penalty would encourage voluntary compliance by delinquent filers and would assist the IRS in obtaining information

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