I have a question concerning an irrevocable simple trust. That is to say that it's an irrevocable, non-grantor trust that, by its terms, necessarily distributes all its income each year. It is in fact the "B" (decedent's) trust of an A-B trust. The surviving spouse is the beneficiary.
Is the trust required to file an informational return, even though any taxable income is deducted so that it has no tax due?
And if so, if a return was not filed, what is the penalty?
Thanks.
Stu
According to instructions for form 1041, if trust gross income (taxable or not) is over $600, there is a requirement to file.
I would expect all the trust net income to be passed through to the beneficiary via a schedule K-1, resulting in no direct taxation of the trust. However if the trust is allowed any deductions, these should be claimed to reduce the taxable amount to the beneficiaries.
The penalty for not filing is a percentage of the tax due, so if no tax due, then no penalty. But, did the beneficiary actually report and pay tax (if any) on the distributed taxable income? The trust should have its own tax ID number, so any 1099-INT, -DIV, -B amounts need to show up somewhere.
-Mark Bole
Makes sense, thanks.
Yes, all tax has been paid. What happened was that when one spouse died, the assets weren't divided into A and B trusts. What I'm trying to figure out is what the damage is from failing to do that (in 2005).
Sounds like we can do it retroactively, file the required returns and otherwise no damage. Is that about the size of it?
Stu
Stuart Bronstein wrote: [...]
Is the trust income relatively straightforward in nature, such as interest and dividends? If so, and there is only one beneficiary, and the trust tax ID didn't exist for past years, it seems like it would be a lot of busywork to file amended individual returns and K-1's and nominee interest/dividend forms back and forth, when the result will not change anything.
I have no direct experience with what the IRS wants in this situation, so can't offer anything more.
-Mark Bole
To me, too. Mostly I wanted to verify that, with no tax due there would be no penalty. It may have been my fault, so I wanted to be prepared if there were additional cost to getting it fixed.
I'll have them consult their own accountant, or bring in one who knows about trust returns, and let him decide what the best approach is.
Thanks again.
Stu
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There is a $50 penalty per k-1 for late filing or failure to file.
Drew Edmundson, CPA Cary, NC
Simple trusts aren't always simple. For instance, what happens to capital gains? If they are retained in the trust (common for A-B type trusts), there could be tax due.
The various penalties are described in the instructions for Form 1041. There could be penalties for failure to file K-1s timely, even if there is no tax liability.
Ira Smilovitz
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Is it a simple trust if income is retained?
Capital gains, passed through to beneficiaries, could be taxed at different rates. OP states there is only one beneficiary, and I understood that all income was previously reported and taxed on that beneficiary's individual return.
-Mark Bole
Trusts are strange beasts, each one is different. They are often written such that capital gains are considered part of the corpus of the trust and not as part of the distributible income.
Ira Smilovitz
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