Penalties for Late Trust Returns

[erchess]

Grandmother gave or possibly bequeathed to mother I think 10K for each of two children who were minors at the time and mother made the mistake of setting up a trust for each child. Each trust owned shares in a managed mutual fund and some treasury paper that paid interest every year. The mother tired of the prep fees of about 1K per year for the two trusts and the taxes on top of that and stopped paying for the trusts' returns to be done in 2003. She liquidated one trust in 2007 and one in 2009 because the kids turned I think 21.

Am I right in saying that the IRS can keep coming after the mother for the taxes due and that the only way out is to file the returns and pay the taxes? Since the returns were not filed the SOL is not in play.

Is there any way I could get some or all of the penalties abated?

Other than mark the last return as final is there anything that has to be done to close out a trust? I am thinking there might be a filing with the SOS the way there is to close a Corp.

[Koss]

Trust Non-filer

She's in a tough spot. Has she been contacted by the IRS?

You might be able to get penalties waived, but not interest.

If she filed returns for several years and then stopped, it is difficult to craft an explanation or argument for waiving the penalties. If the client is unsophisticated and has a low education level, you might be able to make a case that she misunderstood the law, and somehow came to believe that the returns did not need to be filed. It would be a tough sell, but you could get creative. Did someone give her bad advice, thinking that they were grantor trusts?

Maybe she thought that the income only needed to be reported on the kids' returns, and if they had no other income, then they weren't required to file.

You throw s**t on the wall and see if it sticks.

The IRS has special offices and representatives that work with non-filers. You might reach out to your local office, or Taxpayer Advocate, to try to open a dialogue with them. If they seem open to the idea of waiving penalties, you might be able to file the returns by sending them directly to that office. The trick is finding the right person or department. Normally you don't get to talk to the non-filer people until they contact you..

You asked if they can "come after" the mother. The answer is that they can come after the trustee, and in some cases, they can come after the beneficiaries. If all the trust assets were distributed out without paying tax due, the IRS could try to recover the tax from whoever got the trust assets.

In what state was the trust domiciled?

Most states don't require registration or dissolution of the kind of trust you are talking about.

It's a common law trust, and in most states it comes into existence upon the execution of the trust agreement, or, if it's built into a will, upon the death. The trust agreement does not have to be in writing, but most are.

The same principle applies to partnerships in most states. A partnership comes into existence upon the execution of the partnership agreement. Some states require registration of a partnership, but many do not.

State law is not federal tax law. But there are some analogies and loose connections.

Corporations and limited liability companies are legal entities that require registration, and they have an existence and identity that is fiercely independent from the individuals who created them, and from the individuals who own shares or membership interests.

In contrast, trusts and partnerships are pass-through entities whose existence and identity is intricately bound up in the individuals who are the partners, trustees, grantors or beneficiaries.

LLCs often function as pass-through entities, so the comparison isn't perfect.

The real difference is the historical common law. Partnerships and trusts pre-date corporations by hundreds, if not thousands of years. In most states, you simply don't need a "charter" for a partnership or a trust.

BMK

[erchess]

Domicile

is in NC. xxxx