This section of the exam pertains to specialized returns, including those involving trusts, exempt organizations, retirement plans, and farmers. As part of a thorough understanding of businesses, Enrolled Agents are expected to be familiar with these specialized returns.
Trust and Estate Income Tax
A trust is a fiduciary relationship that exists between a trustor and a trustee. The trustor gives the trustee the right to hold title to property or assets for the benefit of a third party, known as the beneficiary. Estates and trusts must file income tax returns just as individuals are required to; however, a trust or a decedent's estate is a separate legal entity for federal tax purposes. A trust can be created during an individual's life (inter vivos) or upon his or her death as provided by a will. A decedent's estate comes into existence at the time of the individual's death.
Many of the same deductions and credits that are allowed to individuals are also provided to estates and trusts. A trust or decedent's estate, however, is allowed an income distribution deduction (for distributions made to beneficiaries). Because of this, a trust or decedent's estate is sometimes considered a "pass-through" entity: the beneficiary, and not the trust or decedent's estate, pays income tax of the distributive share of income.
Enrolled Agents should understand the various types of trusts, and related terms and tax treatments including:
- Distributable net income
- Exclusions and deductions
- Form 1041, Income Tax Return for Estates and Trusts
- Fraudulent trusts (abusive trust arrangements)
- Income in respect of a decedent
- Trust types – grantor, irrevocable, tax shelters, etc.
- Income - allocations
- Separately stated items
- Filing requirements
Exempt organizations are those that are excused from paying federal income tax. IRS Publication 557 provides guidance regarding the rules and regulations that an organization must follow to obtain tax-exempt status, including required forms and documents, the appeals process if tax-exempt status is not granted, and causes of a revocation of tax-exempt status. Organizations that are granted tax-exempt status have certain filing requirements and disclosures that have to be provided to people who donate funds to the organization. Publication 557 also provides information about organizations that fall under section 501(c)(3).
There is a difference between nonprofit and tax-exempt status. Nonprofit status is a state law concept, and may make an organization entitled to certain benefits, such as exemptions from state sales, property and income taxes. Although most federal tax-exempt organizations are nonprofits, organizing as a nonprofit at the state level does not automatically give the organization exclusion from federal income tax. To qualify as exempt from federal income tax, the organization must meet requirements established in the Internal Revenue Code. Exempt organizations should also be aware of unrelated business taxable income (UBTI).
Enrolled Agents should be familiar with the following regarding exempt organizations:
- Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code
- Form 1024, Application for Recognition of Exemption Under Section 501(a)
- Annual 990, Return of Organization Exempt From Income Tax Qualifications for tax-exempt status – for 501(c)(3) and other Section 501(c) organizations
An employer may offer certain benefit plans to employees at no or a relatively low cost to the employees. Employer-sponsored retirement savings plans are useful for the employees because it provides an automatic method of saving, provides certain tax incentives and may allow employees to grow wealth with matching employer contributions. Examples of employer-sponsored retirement savings plans are 401(k)s and some types of IRAs. IRS Publication 560 "Retirement Plans for Small Businesses" provides basic information on the various types of plans. Enrolled Agents should know the following regarding retirement plans:
- Employee contributions and reporting requirements
- Employer contributions
- Filing requirements – Form 5500, Annual Return/Report of Employee Benefit Plan
- Plans for self-employed people
- Prohibited transactions
- Qualified plans
- Non-discrimination rules
A farmer is someone who is engaged in the agriculture industry through growing field crops, orchards and vineyards or raising farm animals, including poultry and livestock. Farmers often qualify for various subsidies, incentives and tax deductions under the U.S. policy. IRS Publication 225 "Farmer's Tax Guide" provides comprehensive information regarding a variety of topics related to farming, including farm income, expenses and inventories. Because farming is treated differently than other industries, it is important for Enrolled Agents to understand the specific farming-related topics including:
- Farm inventory
- Depreciation, depletion and amortization – Special Depreciation Allowance
- Disaster-area provisions
- Disposition of farm assets
- Farm income - self-raised livestock, crop insurance proceeds
- Farm tax computation - Schedule J, Schedule SE, estimated tax
Practices And Procedures
Personal FinanceTo lower your tax bill, make sure that you're taking all the exemptions that apply to you.
Personal FinanceTo be treated as a tax-exempt organization, start by filling out this form.
Personal FinanceBefore you tackle this challenge, know the challenges of forming and operating an official nonprofit organization.
Personal FinanceWant a picture of an organization's activities? This annual form, open to the public, sums up everything from salaries paid to missions accomplished.
RetirementEverything you always wanted to know about setting up trusts, in handy glossary form.
RetirementMany institutions want a piece of your portfolio, but trusts can provide a one-stop shop.
Financial AdvisorA quick estate planning guide for high-net-worth individuals to help minimize taxes and costs, protect assets and plan for care.
Managing WealthAs rules and exemptions tied to the estate tax change, so should your estate plan. Here's why updating it is so important.
Personal FinanceUnderstand the difference between the federal estate tax and state-specific estate taxes. Learn about some of the worst states with estate taxes.
Personal FinanceMost U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.