Of all the tasks that trustees are faced with during a trust administration, filing an income tax return for a trust is one of the most important. The Internal Revenue Service (IRS) imposes interest and penalties when these returns are not properly filed. Trustees who act negligently with regard to these tax matters may subject themselves to scrutiny and possible liability.
Interest and Penalties Imposed By the IRS When A Trustee Fails to File An Income Tax Return for a Trust
When a trustee fails to file an income tax return for a trust as required by the IRS, various interest and penalties may be imposed. Interest may be charged on the following:
- Unpaid taxes on the date such taxes are due
- Penalties imposed for failure to file
- Penalties imposed for negligence or fraud
- Penalties imposed for substantial understatement of tax
- Penalties imposed on reportable transaction understatements
It is also important to note that interest is charged on unpaid taxes even if the trustee was granted a filing extension. The interest period begins on the date the return was due, and the rate imposed is determined by the IRS in the Internal Revenue Code, Section 6621.
In addition to interest charges, trustees may also be faced with paying penalties on behalf of the trust. Following is an overview of these penalties:
- Filing a late return. A penalty of 5% of the tax due may be charged each month during which a return is not filed. This will continue to accrue up until a maximum of 25% of the tax due.
- Paying income tax late. If a trustee fails to pay the tax owed, the IRS imposes a penalty of ½ of 1% of the unpaid amount for each month that the tax remains unpaid.
- Failing to provide timely information. If a trustee fails to provide a Schedule K-1 to a beneficiary who receives a distribution of trust property, the IRS may impose a penalty of $100 for each one he failed to issue by the due date.
- Additional penalties. The IRS may impose other penalties for infractions such as negligence, substantial understatement of tax, and fraud.
Clearly, there is a lot at stake when serving as a trustee. Talk with an attorney to ensure that you correctly handle all responsibilities as trustee including filing an income tax return for a trust. We regularly offer free seminars to help people learn about their estate needs.