Tardy to the e-filing party

Editor: Alexander J. Brosseau, CPA

On July 1, 2019, Congress enacted the Taxpayer First Act, P.L. 116-25. Section 3101 of the act required electronic filing for all returns in the Form 990 series. The act also required that the IRS make the information provided on the forms available to the public in a machinereadable format. This new requirement took effect for tax years beginning after July 1, 2019.

Imagine a hypothetical fantasy realm where the IRS hosted the Modernized e-File Gala (MeF Gala) in January 2020 for all affected forms to celebrate this monumental event. Attendance at the MeF Gala would be mandatory for all forms that received invitations. The MeF Gala would be the talk of the town and a social media spectacle, as all of the most popular charitable forms would be there. No one would want to miss this high-profile event.

Everyone would receive an invite except for Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, and Form 5227, Split-Interest Trust Information Return. In case you are not familiar with Form 5227, let us introduce you. It is an information return used to report data for split-interest trusts. Most Forms 5227 are filed for split-interest trusts as defined in Sec. 4947(a)(2); these trusts can take several forms. A split-interest trust may be a charitable lead trust (CLT), where one or more charitable beneficiaries receive an annuity or unitrust payment for the initial term, followed by distribution to taxable beneficiaries. For CLTs, Form 5227 works in conjunction with Form 1041, U.S. Income Tax Return for Estates and Trusts, to fulfill the trust’s federal tax compliance requirements.

A split-interest trust may instead be a charitable remainder trust (CRT), in which case the Form 5227 works alone to fulfill the federal reporting requirements. CRTs work in the opposite way of CLTs — CRTs make unitrust or annuity payments to one or more taxable beneficiaries during the initial term, followed by a distribution of the remaining principal and income to a charitable entity. A charitable remainder unitrust (CRUT) may have additional intricacies. If funded with assets that may not produce sufficient cash flow to make the required payments to the noncharitable beneficiaries, the CRUT may include provisions that limit the annual distributions to the trust’s fiduciary accounting income (with or without a makeup provision for future years). The CRUT may even be created with a “flip” provision, in which it begins as an income-limited trust, but the payment calculation “flips” to a standard unitrust calculation upon the occurrence of a specific event.

Back in our hypothetical fantasy realm, Form 5227 would watch the mailbox daily, waiting for an invitation to the MeF Gala to arrive. Most of Form 5227’s charitable friends would be at the MeF Gala. Lamenting the fact that an invite had not arrived, they would call the IRS, hoping a representative would confirm the invitation was on its way. Alas, it was not meant to be.

The MeF Gala would have many logistical challenges. Some of the forms would be rejected at the MeF Gala’s doors due to discrepancies between security’s list (the Business Master File) and the forms’ identification. Many forms had to call the IRS E-Filing Help Desk to clarify details and be allowed entrance to the event. This would not make Form 5227 feel better, but they would still wonder why their invitation never came.

As fate would have it, there would be no MeF Gala for the next two years, due to the beginning of a global pandemic. During this time, the IRS would continue to see the advantages of electronic filing for all tax forms due to restrictions on gatherings of large groups that required the expansion of remote work for everyone involved in the taxcompliance process.

Back in reality, the Treasury issued final regulations for the Taxpayer First Act in T.D. 9972, effective Feb. 23, 2023. T.D. 9972 includes Regs. Secs. 301.6011-12 and 301.6011-13, which require all filers of Form 4720 and Form 5227, respectively, to file the return electronically if the taxpayer files at least 10 returns during the calendar year. If the form is required to be electronically filed but the taxpayer instead paper-files the return, it is treated as a failure to file the return, and the IRS may impose applicable penalties and interest.

This time around in our hypothetical fantasy realm, the event planners would make sure the logistical issues of the first MeF Gala would not repeat. They would provide the below reminders for attendees to complete before the MeF Gala to ensure smooth entry procedures into the event, with minimal rejections requiring involvement of the IRS E-Filing Help Desk:

• Make sure the taxpayer employee identification number and business name control match the IRS e-file database;
• Ensure all the narrative questions on the form are answered correctly and not left blank;
• For Form 5227 filing, make sure the assets and donor information on Schedule A, Part V, is complete; and
• For initial-year returns and returns amended during the year per a governing document or court-ordered terminations, ensure that a copy of the governing document or court order is attached to the return via the tax software.

Best of luck to all forms for successful e-filing!

Editor Notes

Alexander J. Brosseau, CPA, is a senior manager in the Tax Policy Group of Deloitte Tax LLP’s Washington National Tax office. For additional information about these items, contact Brosseau at abrosseau@deloitte.com. Unless otherwise noted, contributors are associated with Deloitte Tax LLP.

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