Untaxed Income

(Added 5/15/2012)

Q

I'm the planned giving director at a small university, and we just began the process of outsourcing our trust administration to a professional firm. We currently act as trustee of our trusts, but want to change that too. Until now, as the program has been relatively small, we've been preparing the trust's tax returns and making the payments ourselves. The firm we just hired notified us that for one of the trusts, we did not report a beneficiary's taxable income correctly (the donor is the income beneficiary), and we have learned that she 'owes' the IRS more than $50,000. The firm won't sign off on the administration or act as trustee of the trust until this is straightened out (although they haven't suggested the best way to straighten it out). My boss says that we should just let it go - let the firm not take responsibility for this trust's history, but to make sure the tax notifications are done correctly from now on. He is adamant about not making this issue the donor's problem. He also says he would be fine with continuing to act as trustee for this trust (the donor is elderly - another reason, he says, not to alarm her). This sounds fine to me, but I wonder if the IRS will notice the difference and then conduct an audit. I also wonder if that really is the right thing to do.

A

Most ethical dilemmas are choices between doing two right things - or at least between what at first seem like two good but competing values. (If it were merely a choice between right and wrong, there would be no dilemma.) On the one hand, you want to protect the income beneficiary (the donor) from your mistakes; on the other, you want to do the right thing. Almost certainly, however, staying mute is not the right course of action. While it's good to avoid alarming old people, it's actually better to deal honestly with them.

You've got to come clean. The first course of action I'd recommend is to ask a knowledgeable attorney, after you have outlined the issue completely and thoroughly and without bias, what the legal ramifications are. Although in principle, the amount of money should not matter, $50,000 is enough to capture the IRS's - and your donor's - attention. But do not - and let me repeat: do not permit your attorney to make ethical decisions for you. Consider his or her advice, but make this decision based on what is right; not what you can legally get away with, and not on the basis of whether anyone thinks that the IRS will ever notice. And what is right involves something you say your boss does not want: telling the donor. Will she be upset? Very possibly. But that cannot have anything at all to do with how you resolve this problem.

Your boss is wrong to want to brush this under the rug and pretend it never happened. While he couches his attitude in a concern for the donor, I strongly suspect he also wants to protect himself and others with supervisory responsibility (people in the accounting office?) for the administration of the program. You made a mistake and you need to fess up to it. And soon. A practical consequence, as you mention, is that the IRS might notice that the trust all of a sudden is paying taxable income. Whether those at the IRS who examine charitable trust returns are the type to correlate historical data is, however, only of academic concern. Now that you know the facts, doing nothing would be living a lie.

Your attorney might suggest ways to help the donor in this situation, but, as an attorney has already told me, the donor owes the money.

Send us a Comment