On Oct. 3, 2018, the IRS Tax Exempt and Government Entities Division (TE/GE) released its Fiscal Year 2019 Program Letter, summarizing its compliance program and focus for FY 2019. Included among the approved compliance priorities are Internal Revenue Code (“Code”) Section 4947(a)(1) Non-Exempt Charitable Trusts (NECTs) with a focus on (i) organizations that under-report income or over-report charitable contributions; and/or (ii) organizations that are required to file, but fail to file, Form 1041, U.S. Income Tax Return for Estates and Trusts.
Trustees that are currently administering NECTs or have assumed or will assume the responsibility for NECTs that were previously administered by other parties should review such trusts and ensure that an overall compliance strategy is in place for the administration of such trusts.
Federal Tax Filing Requirements and Penalties for Non-Compliance
A Code Section 4947(a)(1) NECT generally is a trust in which all of the unexpired interests are devoted to charitable purposes and that is not exempt from tax under Code Section 501(a). A NECT must file Form 990, Return of Organization Exempt From Income Tax, and Schedule A thereto if the trust is not treated as a private foundation (e.g., if it is treated as a supporting organization) or Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation, if the trust is treated as a private foundation. In addition, a NECT must file Form 1041 if the trust has taxable income for a given tax year. A NECT may also have to file Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, if there is liability for excise taxes.
NECTs that are not properly administered or fail to comply with their tax filing obligations may be subject to penalties for noncompliance including, as applicable, penalties for failure to file tax returns, tax on investment income per year, plus interest, and excise taxes and penalties for failure to make annual qualifying distributions.
Taft has substantial experience and can assist trustees in formulating and implementing cost-effective compliance strategies for NECTs, including:
- Reviewing trusts to determine if a trust qualifies as a private foundation or a supporting organization.
- Preparing and filing Form 1023, Application for Recognition of Exemption Under Code Section 501(c)(3), on behalf of trusts to alleviate the burden and expense of filing a Form 1041, and working with the IRS to determine and negotiate proposed exempt status effective dates for such trusts.
- Amending and modifying trusts to qualify for exemption under Code Section 501(c)(3) with the cooperation of trust beneficiaries and relevant government authorities.
- Reviewing tax return filings to assess tax compliance history and identify any compliance gaps or related issues.
- Requesting abatement of any related tax penalties from the IRS.
- Terminating trusts that are no longer economically feasible to continue in an equitable and practical manner with the cooperation of trust beneficiaries and relevant government authorities.
- Recommending steps to ensure proper administration of trusts going forward.
For more information, please contact any member of Taft’s Tax practice group.