New foreign trust tax form project: 1041NR.

• Author: McNamara, Lawrence H.

IRS representatives recently approved a joint project with the AICPA Foreign Trust Task Force. (1) Together they will design a new Form 1041NR, U.S. Income Tax Return for Foreign Estates and Trusts, which tax return preparers and IRS personnel will find easier to understand, prepare, and process. This article summarizes the objectives, complexity, and expected rewards for this ambitious endeavor.

Importance of New Tax Form Project

In December 2006 and January 2007, the Real Property, Probate and Trust Law Section of the American Bar Association (ABA RPPTL) and the AICPA, respectively, submitted comments to the IRS in response to its request regarding foreign trust tax reporting issues. (2) One of the high-priority items suggested by the AICPA Trust, Estate & Gift Tax Technical Resource Panel was the creation of a new Form 1041NR, which could report the tax information of foreign trusts, much like Form 1041, U.S. Income Tax Return for Estates and Trusts, for domestic trusts. Such reporting would avoid the current confusion encountered when reporting "trust information" on Form 1040NR, U.S. Nonresident Alien Income Tax Return, which is designed primarily for individual taxpayers. The Service would enjoy a double benefit: fewer mistakes in return processing and increased tax compliance by taxpayers.

Both the AICPA and ABA RPPTL acknowledge that foreign trusts are currently required to file Form 1040NR. In addition, certain foreign trusts and their U.S. beneficiaries must file Forms 3520-A, Annual Information Return of Foreign Trusts with a U.S. Owner, and 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, respectively. For foreign nongrantor trusts (in which the trust settlor is not considered the trust owner for U.S. tax purposes), both the AICPA and ABA RPPTL urged that the IRS issue a new Form 1041NR. This new form will be designed specifically for foreign trust reporting, computations, and disclosure of tax information for easier preparation and processing. For example, the current Form 1040NR has no designated line for customary trust tax deductions from gross income, such as fiduciary fees, charitable deductions (as reported on Schedule A of Form 1041), legal/accounting fees, or an income distribution deduction.

Further limitations of the current Form 1040NR include:

* No mechanism to allocate federal tax payments to trust beneficiaries (per Sec. 643(d)) if the fiduciary elects to do so...