COMPARISON OF JOINT COMMITTEE STAFF AND TREASURY

MMENDATIONS RELATING TO PENALTY AND INTEREST PROVISIONS

OF THE INTERNAL REVENUE CODE

Scheduled for a Public Hearing

Before the

SUBCOMMITTEE ON OVERSIGHT

of the

HOUSE COMMITTEE ON WAYS AND MEANS

on November 9, 1999

Prepared by the Staff

of the

 JOINT COMMITTEE ON TAXATION

November 5, 1999

JCX-79-99
(i)

CONTENTS

Page

................................................................................. 1

s. 6601-6621) ..................................................................... 2

derpayments and Overpayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

me Tax Treatment of Interest on Underpayments and Overpayments . . . . . . . . . . . . . . . . . . . . . . . . . . 3

als . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

ions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

ng .............................................................................. 4

f Interest Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

nable error or delay by IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

s refunds ......................................................................... 4

 reliance on written IRS statements .................................................... 4

atements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

erve Accounts ..................................................................... 6

AY ESTIMATED TAX (secs. 5564 and 6655) ........................................... 7

ndividuals and Corporations (secs. 6654 and 6655) ........................................ 7
Page

(ii)

 Penalty for Individuals (sec. 6654(e)(1)) ................................................ 7

fe Harbor for Certain Individuals (sec. 6654(d)(1)) ........................................ 8

nterest Rate for Individuals and Corporations (secs. 6621, 6654(a)(1), and 6655(a)(1)) ............ 8

of Underpayment Balances for Individuals and Corporations (secs. 6654(a) and 6655(a)) .......... 9

ax Underpayments Extending from Leap Year to Non-Leap Year for Individuals and Corporations . . 9

enalty for Failure to Pay Estimated Tax for Individuals (sec. 6654(e)(3)) . . . . . . . . . . . . . . . . . . . . . . . 10

e Minimis Penalties for Individuals and Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

 FAILURE TO PAY TAXES (sec. 6651(a)(2) and (3)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

nstallment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

 FAILURE TO FILE TAX RETURNS (sec. 6651(a)(1)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

ailure to File “No Balance” Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

ACCURACY PENALTIES (secs. 6662 and 6694) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

pplicable to Disclosed Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Page

(iii)

s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

ners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

pplicable to Undisclosed Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

ners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

ARER PENALTIES (sec. 6694) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

osition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

eckless Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

 FILING A FRIVOLOUS TAX RETURN (sec. 6702) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

 FAILURE TO DEPOSIT TAXES (sec. 6656) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

OR FAILURE TO FILE FORM 5500 SERIES ANNUAL RETURN FOR PENSION AND OTHER

OMPENSATION PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

 FAILURE TO FILE ANNUAL INFORMATION RETURNS FOR CHARITABLE

TRUSTS (sec. 6652(a)(2)(A)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ttee on Taxation, Study of Present-Law Penalty and Interest Provisions as Required by Section 3801 of the

ice Restructuring and Reform Act of 1998 (including Provisions Relating to Corporate Tax Shelters) (JCS-3-

of the Treasury, Report to The Congress on Penalty and Interest Provisions of the Internal Revenue Code,

nt may be cited as follows: Joint Committee on Taxation, Comparison of Recommendations of the Joint

n Staff and the Treasury Relating to Interest and Penalties (JCX-79-99), November 5, 1999.

he “Recommendation” columns of this document, “Retain present law” means that an explicit recommendation

 law be retained. “No recommendation” means that no explicit recommendation was made with respect to that

nt does not reflect recommendations directly relating to tax shelters.

- 1 -

INTRODUCTION

ittee on Oversight of the House Committee on Ways and Means has scheduled a public hearing on November 9,

nd interest provisions of the Internal Revenue Code. The Internal Revenue Service Restructuring and Reform

he Joint Committee on Taxation and the Department of the Treasury to undertake separate studies of such

any legislative and administrative recommendations they deem appropriate to simplify penalty administration

urden. The staff of the Joint Committee on Taxation released its study1 on July 22, 1999, and the Treasury

ts study on October 25, 1999.2

,3 prepared by the staff of the Joint Committee on Taxation, provides a comparison of the legislative changes to

t provisions of the Code recommended4 by the Joint Committee staff and the Department of the Treasury.5
-2-

N PRESENT LAW JCT STAFF

RECOMMENDATIONS

TREASURY

RECOMMENDATIONS

. 6601-

ayments

Different interest rates apply tooverpayments andunderpayments and dependingon whether the taxpayer is acorporation. For individualsand other non-corporatetaxpayers, the interest rate onboth overpayments andunderpayments is equal to theshort-term Applicable FederalRate (“AFR”) plus threepercentage points. Forcorporations, the interest rateon overpayments equals theshort-term AFR plus twopercentage points, unless theoverpayment exceeds $10,000in which case the interest rateequals the short-term AFR plus one-half a percentagepoint. For corporations, theinterest rate on underpaymentsequals the short-term AFRplus three percentage points,unless the underpayment

Provide a single interest rateequal to the short-term AFRplus five percentage points forunderpayments andoverpayments of all taxpayers.

Retain present law; ratesshould be in range of AFRplus two to five percentagepoints.
N PRESENT LAW JCT STAFF

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RECOMMENDATIONS

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exceeds $100,000 in whichcase the interest rate equals theshort-term AFR plus fivepercentage points.

ax

 on

Individuals are generally

required to includeoverpayment interest receivedin income, but no deduction isallowed for underpaymentinterest paid.

Exclude overpayment interestfrom individuals’ grossincome.

Retain present law.

Corporations are generally

required to includeoverpayment interest receivedin income and allowed todeduct underpayment interestpaid.

No recommendation. No recommendation.
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RECOMMENDATIONS

TREASURY

RECOMMENDATIONS

-4-

A special rule provides for a

net interest rate of zero to theextent interest is both payableby and allowable to a taxpayeron equivalent amounts ofunderpayment andoverpayment.

Interest netting would not benecessary on a prospectivebasis, because under the JCTstaff recommendation theFederal income tax treatmentand interest rate onunderpayments andoverpayments would be thesame.

Retain present law.

erest

or or delay

Interest may be abated ifattributable to unreasonableerror or delay by IRS in theperformance of a ministerial ormanagerial act.

Allow abatement if interest isattributable to anyunreasonable error or delay byIRS.

Retain present law.

s Interest must be abated if

refund did not exceed $50,000and taxpayer did not cause therefund.

Allow abatement for allerroneous refunds the taxpayerdid not cause.

Consider modification only inconcert with assuring that theIRS has adequate means torecover erroneous refunds.

 on

ts

If an underpayment resultsfrom taxpayer reliance onwritten IRS statementspenalties, but not interest, maybe abated.

Abate both penalties andinterest if underpaymentresults from taxpayer relianceon written IRS statements.

Same as JCT staffrecommendations, with samerestrictions for interestabatement as under presentlaw for penalty abatement.
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-5-

Abatement of interest is also

allowed (and under certaincircumstances is required) ifthe taxpayer is serving in acombat zone or located in adesignated disaster area.For individuals, the accrual ofinterest is suspended if the IRSdoes not provide notice of thetaxpayer’s liability within oneyear (18 months for taxableyears beginning before 2004).

Retain present law and alsoallow abatement if a grossinjustice would otherwiseresult if interest were to becharged.

Retain present law.
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-6-

Accounts In order to avoid the accrual of

interest on a disputed item, thetaxpayer may make a noninterest bearing deposit in thenature of a cash bond (asdescribed in Rev. Proc. 84-58).

Permit deposits to be made toan interest bearing accountwithin Treasury to cover taxunderpayments related toissues potentially subject todispute with the IRS. Fundsdeposited would be treated as apayment of tax if anunderpayment of tax isultimately found. If there is noresulting underpayment or, atthe election of the taxpayer,the deposit is withdrawn priorto resolution of the IRSdispute, interest would be paidby the Treasury at a rate equalto the short-term AFR.

No recommendation.
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RECOMMENDATIONS

TREASURY

RECOMMENDATIONS

PAY

 (secs.

Individuals generally arerequired to make estimated taxpayments at least equal to (1)90 percent of current year’s taxor (2) 100 percent of prioryear’s tax. Corporationsgenerally are required to makeestimated tax payments at leastequal to (1) 100 percent of thecurrent year’s tax or (2) 100percent of the prior year’s tax.

duals and

654 and

A penalty is imposed byapplying the underpaymentinterest rate to the amount ofthe underpayment for theperiod of underpayment. 

Repeal penalty and replacewith an interest provision.

Retain present law.

alty for

4(e)(1))

There is no penalty if the taxshown on the return, reducedby withholding, is less than$1,000. Estimated tax is notconsidered in determiningwhether the threshold issatisfied.

Increase threshold to $2,000,and consider estimated taxpayments made in four equalinstallments in determiningwhether the threshold issatisfied.

Retain present law threshold of$1,000, and consider estimatedtax payments made under anew proposed simplifiedaveraging method indetermining whether thethreshold is satisfied.
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RECOMMENDATIONS

TREASURY

RECOMMENDATIONS

-8-

arbor for

sec.

Individuals with prior year’sAGI above $150,000 ($75,000for married individuals filingseparately) who makeestimated payments based onprior year’s tax generally mustdo so based on 110 percent ofprior year’s tax.

Repeal the modified safeharbor; thus, all taxpayersmaking estimated paymentsbased on prior year’s taxwould do so based on 100percent of prior year’s tax.

No recommendation.

st Rate

621,

(a)(1))

The underpayment interest rateis subject to change on the firstday of each calendar quarter. A change in rates requires theuse of multiple interest rateswhen calculating the intereston an underpayment ofestimated tax.

Apply only one interest rateper estimated taxunderpayment.

No recommendation, butconsider generalcomputational simplifications.
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RECOMMENDATIONS

-9-

ces for

orations

655(a))

Penalty is equal to theunderpayment interest ratemultiplied by the number ofdays the underpayment isoutstanding, which is thenumber of days between whenthe taxpayer should have madethe payment and the earlier of(1) actual date of payment or(2) the following April 15 (forcalendar-year taxpayers).

Provide that underpaymentbalances are cumulative; thus,taxpayers would calculate acumulative estimated taxunderpayment for each period.

No recommendation, butconsider generalcomputational simplifications.

nding

on-Leap

and

Under IRS procedures,taxpayers with outstandingunderpayment balances thatextend from a leap yearthrough a non-leap year mustmake separate calculations toaccount for the differentnumber of days in each year.

Require 365-day year for allestimated tax penaltycalculations.

No recommendation, butconsider generalcomputational simplifications.
N PRESENT LAW JCT STAFF

RECOMMENDATIONS

TREASURY

RECOMMENDATIONS

-10-

y for

ated Tax

A waiver is available to theextent the Treasury Secretarydetermines that a taxpayersuffered a casualty (e.g., fire ordisaster) or other unusualcircumstance if imposition of apenalty would be againstequity and good conscience. There is no general reasonablecause waiver for the failure topay estimated tax.

See JCT staffrecommendations regardingabatements of interest (pages4-5).

Permit a reasonable causewaiver for first-time payers ofestimated tax, provided thebalance due on the return isbelow a threshold amount(unspecified) and is paid witha timely-filed return.

nimis

uals and

There is no statutory provisionallowing the TreasurySecretary to waive estimatedtax penalties below a deminimis amount. 

See JCT staffrecommendations regardingabatements of interest (pages4-5).

Provide penalty waiverauthority for individualestimated tax penalties below ade minimis amount, e.g., $10to $20.
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N PRESENT LAW JCT STAFF

RECOMMENDATIONS

TREASURY

RECOMMENDATIONS

R

 TAXES

 (3))

Penalty is one-half percent of

net amount of tax due for eachmonth the return is not filed,up to a maximum of 25percent. Interest also appliesto the unpaid tax.

Repeal penalty. Interest wouldcontinue to apply.

Retain present law, except increase penalty percentagerate after six months from onehalf percent a month to onepercent a month.

ment

Penalty rate is reduced to onequarter percent per month forany month an installmentagreement is in effect(provided return is timelyfiled). IRS imposes $43 userfee on installment agreements.

Impose a 5-percent latepayment service charge if noinstallment agreement is ineffect by the fourth monthafter assessment; waive $43IRS user fee if taxpayer agreesto automated withdrawal ofinstallment payments frombank account.

Reduce penalty rates by onehalf for any month aninstallment agreement is ineffect. Consideration shouldbe given to using a fixedinterest rate to avoid possibleballoon payment at end ofagreement.
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TREASURY

RECOMMENDATIONS

R

E TAX

51(a)(1))

Penalty is five percent of net

amount of tax due for eachmonth return is not filed, up toa maximum of 25 percent. This penalty is coordinatedwith the failure to pay penalty,by reducing the failure to filepenalty by the amount of thefailure to pay penalty for thatmonth.

Retain present law. Lower rates to one-half

percent for first five months,then increase to one percent;retain 25 percent maximum;eliminate coordination withfailure to pay penalty, whichhas the effect of potentiallydoubling combined penaltiesfor taxpayers who delay filingand paying for lengthy periodsof time.

e to File

ns

No penalty is imposed on thefailure to file returns that donot show a balance due theIRS.

No recommendation. Impose new service charge,

possibly only after IRS contact(amount unspecified).
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N PRESENT LAW JCT STAFF

RECOMMENDATIONS

TREASURY

RECOMMENDATIONS

ALTIES

4)

able to 

Penalty may apply if there is

no reasonable basis for adisclosed position taken on areturn. (Generally, at least a20 percent likelihood ofsuccess if challenged.)

Penalty may apply if there isno substantial authority for adisclosed position taken on areturn. (Generally, at least a40 percent likelihood ofsuccess if challenged.)

Penalty may apply if there isno realistic possibility ofsuccess on the merits. (Generally, at least a 33-1/3percent likelihood of success ifchallenged.)

Penalty may apply unless a

disclosed position is notfrivolous. (Generally, at leasta 5 to 10 percent likelihood ofsuccess if challenged.)

Penalty may apply if there isno substantial authority for adisclosed position taken on areturn. (Generally, at least a40 percent likelihood ofsuccess if challenged.)

Penalty may apply if there isno realistic possibility ofsuccess on the merits. (Generally, at least a 33-1/3percent likelihood of success ifchallenged.)
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able to

s

Penalty may apply if there is

no substantial authority for theundisclosed position. (Generally, at least a 40percent likelihood of success ifchallenged.)

Penalty may apply unless thetaxpayer reasonably believesthat the tax treatment is morelikely than not the correct taxtreatment under the Code.(Generally, more than 50percent likelihood of success ifchallenged.)

Penalty may apply if there isno substantial authority for theundisclosed position. (Generally, at least a 40percent likelihood of success ifchallenged.)

Penalty may apply if there is

no realistic possibility of beingsustained on the merits. (Generally, at least a 33-1/3percent likelihood of success ifchallenged.)

Penalty may apply unless thetaxpayer reasonably believesthat the tax treatment is morelikely than not the correct taxtreatment under the Code. (Generally, more than 50percent likelihood of success ifchallenged.)

Penalty may apply if there isno substantial authority for theundisclosed position. (Generally, at least a 40percent likelihood of success ifchallenged.)
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N PRESENT LAW JCT STAFF

RECOMMENDATIONS

TREASURY

RECOMMENDATIONS

PARER

694)

on If an understatement is due to

a position for which there wasnot a realistic possibility ofbeing sustained on its meritsand the position was notdisclosed or was frivolous, thepreparer penalty is $250.

Impose penalty equal togreater of $250 or 50 percentof preparer’s fee.

Similar to JCT staffrecommendation but exactpercentage of penalty isunspecified.

ss

If an understatement is due towillful or reckless conduct, thepreparer penalty is $1,000.

Impose penalty equal togreater of $1,000 or 100percent of preparer’s fee.

Similar to JCT staffrecommendation but exactpercentage of penalty isunspecified.
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N PRESENT LAW JCT STAFF

RECOMMENDATIONS

TREASURY

RECOMMENDATIONS

OR

LOUS

. 6702)

The penalty for filing afrivolous income tax return is$500.

No recommendation. Increase the penalty to $1,500;

permit abatement for first timeoccurrence if nonfrivolousreturn is filed within areasonable period of time afterfiling the frivolous return.
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RECOMMENDATIONS

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OR

OSIT

There is a four-tier penalty ratestructure for failure to deposittaxes:(1) A depositor is subject to apenalty equal to two percent ofthe amount of theunderpayment if the failure iscorrected on or before the datethat is five days after theprescribed due date.(2) A depositor is subject to apenalty equal to five percent ofthe amount of theunderpayment if the failure iscorrected after the date that isfive days after the prescribeddue date but on or before thedate that is fifteen days afterthe prescribed due date.(3) A depositor is subject to apenalty equal to ten percent ofthe amount of theunderpayment if the failure iscorrected after the date that is 

No new legislation for at leasttwo years to allow scheduledstatutory and regulatorychanges to be reviewed andimplemented. However,consideration should be givento revising regulations topermit penalty abatement forinadvertent failures occurringwhen taxpayer changes to adifferent deposit schedule.

Few intermediate changesshould be made at this time tothe deposit rules or penalties toprovide a sufficient period oftime for changes to the depositrules to take effect. Thepenalty for failure to use thecorrect deposit method shouldbe reduced from ten percent totwo percent. Considerationshould be given to reducingthe present-law two percentpenalty if failure to deposit iscorrected within one bankingday.
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fifteen days after the due datebut on or before the date that isten days after the date of thefirst delinquency notice to thetaxpayer.(4) A depositor is subject to apenalty equal to fifteen percentof the amount of theunderpayment if the failure isnot corrected on or before thedate that is ten days after thedate of the first delinquencynotice to the taxpayer.Many taxpayers are required tomake deposits of taxes; thefrequency of the depositsdepends on the type of tax andthe amount required to bedeposited.
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RECOMMENDATIONS

TREASURY

RECOMMENDATIONS

OR

E FORM

UAL

NSION

ERRED

 PLANS

52(e),

The Code and Titles I and IVof ERISA impose 3 separatepenalties for failure to file atimely and complete return;the Code imposes separatepenalties for failure to fileSchedule SSA, Schedule B,and notification of plan statuschange.The IRS, Department ofLabor, and Pension BenefitGuaranty Corporationadminister the separatepenalties.

Consolidate the separate Codeand ERISA penalties forfailure to file timely andcomplete return into onepenalty.Designate the IRS as theagency responsible foradministration of theconsolidated penalty.

Consolidate the separate Codeand ERISA penalties forfailure to file timely andcomplete return into onepenalty.Designate the Department ofLabor as the agencyresponsible for administrationof the consolidated penalty.
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RECOMMENDATIONS

TREASURY

RECOMMENDATIONS

R

E

MATION

USTS

Split-interest trusts (andcertain other organizations) arerequired to file Form 1041-A(Trust Accumulation ofCharitable Amounts). Thepenalty for failure to file Form1041-A is $10 for each dayreturn is not filed, up to amaximum of $5,000 for anyone return. Split-interest trustsare also required to file Form5227 (Split-Interest TrustInformation Return). It is notclear under present law thatany penalty applies to thefailure to file Form 5227.

Provide that the penalty forfailure to file Form 5227 isequivalent to the penalty forfailure to file Form 990. Consider increasing penaltiesapplicable to failure to fileForm 1041-A. 

No recommendation.