Did not receive K-1 form for trust payments, can I avoid penalties and interest?

[dgonen]

I received money from a trust in 2017.  I did not receive a K-1 form and was told the trust had paid all the taxes.  However, I found out from the IRS that the trust did file a K-1 form, but the trustee has admitted she neglected to send it to me.  I therefore did not pay any taxes on my 2017 return.  Now the IRS says I owe the taxes plus penalty and interest.  Since the trustee has admitted she failed to send me the K-1 form, then can I ask the IRS to waive the penalty and interest?

[Critter]

You can ask for the penalty to be waived and they may do it ... however they will not forgive the interest.  Get the trust to reimburse you for the interest & penalty.  

[dmertz]

Actually, seek reimbursement from the trustee, not from the trust.  It's the trustee who has the fiduciary responsibility.  The trust should not be penalized for a failure of the trustee.

[dgonen]

The trustee has offered to reimburse me, but I feel bad for her and would prefer the IRS to waive the penalty since I did not know I owed any tax.

[dmertz]

See the following IRS page on Penalty Relief:

https://www.irs.gov/businesses/small-businesses-self-employed/penalty-relief

Under the circumstances, it seems that you have reasonable cause to get relief from the penalty, particularly if you have a statement from the trustee saying that the trustee failed to provide you with the Schedule K-1.  You would then have to decide how much reimbursement from the trustee is appropriate since it's possible for you to have had the money that should have been used to pay the tax invested at a rate that would cover at least part of the interest rate charged by the IRS on the late tax payment.