Question for JohnH - Form 990 T

[JG EA]

I have one client who receives K-1's from a PTP in an IRA along with a letter explaining that the 990-T must be filed if the totals exceed $1K, but then the kicker comes in -->

This custodian DOESN"T OFFER to handle the 990-T filing, even for a fee. They require the client to get the 990-T filed and then send it to them so they can pay the tax out of the plan. Talk about passing the buck! Why would anyone deal with a company like that?

I've explained to the client that paying for the 990-T preparation and then also paying the tax is effectively reducing his actual net return on the PTP, but somehow his financial advisor has him convinced that this is still a good idea. The only thing I'm convinced of is that there are a lot of gullible people out there, coupled with a lot of incompetent (or dishonest) financial advisors.

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Last edited by JohnH : Yesterday at 06:42 AM.

How can this be when it has to be filed by the organization???

Instructions for Form 990 – T
Who Must File
Any domestic or foreign organization exempt under section 501(a) or section 529(a) must file Form 990-T if it has gross income from a regularly carried on unrelated trade or business, of $1,000 or more. See Regulations section 1.6012-2(e). Gross income is gross receipts minus the cost of goods sold. (See Regulations section 1.61-3.)

[JohnH]

Interesting question, but I don't have an answer - here's an excerpt from the letter from the custodian:

"As the account owner, it is your responsibility to determine if the filing of IRS Form 990-T is necessary. If the filing is required, you must first file IRS Form SS-4 to obtain an EIN for your IRA. Once you obtain an EIN, you must then complete IRS Form 990-T and send it to (xxxx) for us to sign on behalf of the IRA. Be sure to include your written instructions to authorize (xxxx) to pay the appropriate tax from your IRA. Please be advised that there will be a $50 processing fee for each 990-T and the corresponding payment."

Then they urge the account holder to contact their tax pro regarding obtaining the EIN and completing the 990-T. Of course, they don't mention that this will also involve charges - they leave it to the tax pro to explain why that is necessary.

Maybe the reason the client must prepare the 990-T is because the exempt organization is the IRA, and the UBTI income is the amount showing on the K-1 (??) In that case, if there are several K-1's coming in for the same IRA, then all the K-1's must be added together to determine if the $1K threshhold is exceeded.

[Nashville]

Dodging Responsibility

John, the IRS needs to put these idiots out of business. Pretty blatant if you ask me.

[JohnH]

I agree completely.
Their customers should put them out of business by withdrawing their funds, but I guess they operate on the theory that there are plenty of suckers out there.

[Bees Knees]

The PTP is not the IRA. The PTP is a regular for-profit business, just like any other partnership. It itself is not required to file Form 990-T because the PTP is not a tax-exempt organization.

The trustee of the IRA is not a tax exempt organization. The trustee, whether a bank or a brokerage firm, is a for-profit business just like any other business. It itself is not required to file Form 990-T because the trustee is not a tax-exempt organization.

The tax-exempt organization in this case, therefore, is the IRA itself. Since the IRA (a tax-exempt organization) is a partner in a for-profit partnership, then it itself is required to file Form 990-T and pay the tax.

The fact that this particular trustee of the IRA doesn’t file Form 990-T for any of its clients is no surprise. Most IRA trustees never have to file Form 990-T because most IRAs do not conduct business for profit. Most IRAs are investors, not business owners. I don’t file Form 990-T either, and I am in the business of filing tax returns for clients. That is why the trustee says “you have to do it yourself.”

The fault here is the one who insists on owning a business through an IRA. You can do it, but the consequence is having to file and pay tax using Form 990-T, which kind of defeats the whole purpose of tying up your money in a tax-deferred IRA that is not allowed to defer tax.

[Davc]

Disagree. the definition of trustee:

2 a: a natural or legal person to whom property is legally committed to be administered for the benefit of a beneficiary (as a person or a charitable organization)

Also see 990-T instructions under "Who Must File" where fiduciaries of IRA's meeting the threshold are specifically listed. Not the owners, the fiduciary.

[Bees Knees]

I agree a fiduciary of an IRA is required to file form 990-T if there is unrelated business income. No different than any other taxpayer earning income that is required to file a tax return. The question is whether or not the fiduciary has to prepare the tax return, or whether the fiduciary can pass that responsibility onto some else.

An individual earning income is required to file Form 1040. However, that same individual is allowed to hire YOU to prepare the return for him or her.

A fiduciary of an IRA earning unrelated business income is required to file Form 990-T. However, that same fiduciary is allowed to hire a professional to prepare the return (for a fee that is passed along to the IRA owner), or allow the IRA owner to prepare the return at his or her own discretion.

Nothing in the IRS regs prohibits the fiduciary to pass along the cost and filing chores to the owner.

[Davc]

The responsibility remains with the fiduciary.

[JG EA]

Thanks JohnH and all. I'm glad you all are such clear thinkers. I didn't reason on the tax-exempt organization thing. I just felt the general NMP. (I just watched Sleepless in Seattle again so I'm into initialisms.)

But I already went through trying to put this particular PTP on the clients returns - it doubled the bulk of the returns, caused me hours and hours of research, he complained to the broker and that's when it went into the IRA.

My plan is now to call the broker and find out what they do or don't do and if they don't do I'll then hope for under $1,000.