Who Is Responsible for Filing Form 990-T for an IRA?
An IRA owner is legally responsible for taxes on certain income, but the custodian typically files Form 990-T. Understand this collaborative process.
Individual Retirement Arrangements (IRAs) are known for their tax-advantaged growth, but certain circumstances can interrupt this tax deferral. This occurs when an IRA has investments that generate a specific type of business income, creating a tax liability for the IRA itself. This triggers a requirement to file Form 990-T, Exempt Organization Business Income Tax Return, which addresses a tax obligation belonging to the IRA, separate from the owner’s personal income tax return.
Understanding the IRA Filing Requirement
The necessity for an IRA to file Form 990-T is triggered by the presence of Unrelated Business Taxable Income, or UBTI. For an IRA, whose tax-exempt purpose is to hold assets for retirement, income generated from an active trade or business it owns is considered “unrelated.” This structure was established to prevent tax-exempt entities from having an unfair competitive advantage over taxable businesses.
The most common sources of UBTI within an IRA are investments in pass-through entities like Master Limited Partnerships (MLPs) or private equity funds. These partnerships often operate active businesses, such as energy pipelines or exploration, and the income passed through to the IRA is treated as UBTI. Another trigger is the use of debt to acquire an asset, known as Unrelated Debt-Financed Income (UDFI), which is a subset of UBTI. For instance, if an IRA uses a loan to purchase a rental property, a portion of the net income from that property is classified as UDFI and is taxable.
A filing requirement is not triggered by any amount of UBTI. The Internal Revenue Code sets a specific threshold that mandates action. An IRA must file Form 990-T only when it has $1,000 or more of gross income from the aggregate of its unrelated business activities during the tax year. This means that even if deductions and losses ultimately reduce the taxable income below this amount, the filing is still required if the gross income from these sources meets the $1,000 test.
Roles of the IRA Owner and Custodian
While the IRS instructions for Form 990-T state that the fiduciary is responsible for filing, the practical application of this rule creates a shared responsibility. The ultimate legal obligation to ensure the form is filed and the tax is paid correctly rests with the IRA owner, as it is their retirement asset.
The IRA owner’s primary function is to monitor their investments for activities that could generate UBTI. This is particularly relevant for individuals with self-directed IRAs, who often invest in assets like private placements or real estate that are more likely to produce such income. When an investment, such as an MLP, generates UBTI, the owner receives a Schedule K-1. It is the owner’s duty to recognize the UBTI reported on this form and to promptly forward this documentation to their IRA custodian to initiate the tax filing process.
The IRA custodian, especially one that specializes in self-directed accounts, handles the mechanical aspects of the filing. Upon receiving the necessary information, such as the Schedule K-1, from the account owner, the custodian will prepare Form 990-T on behalf of the IRA. The custodian signs the return as the fiduciary and facilitates the payment of any tax due directly from the cash held within the IRA.
The Filing Process for Form 990-T
The process begins with gathering the correct documentation, the most important of which is the form that reports the UBTI, such as a Schedule K-1 from a partnership. This document details the IRA’s share of income and deductions from the business activity, with UBTI often specifically identified in Box 20 with code V.
A prerequisite for filing is that the IRA must have its own unique Employer Identification Number (EIN). An IRA owner’s Social Security Number cannot be used, as the IRA is considered a separate taxable entity for this purpose. The IRA custodian typically assists the owner in applying for an EIN from the IRS. This EIN must be used on the Form 990-T.
The tax payment is not a distribution to the owner and is not reported on Form 1099-R. The standard deadline for this filing is April 15th, though an automatic six-month extension can be requested by filing Form 8868.