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Part 21. Customer Account Services

Chapter 7. Business Tax Returns and Non-Master File Accounts

Section 4. Income Taxes/Information Returns

21.7.4  Income Taxes/Information Returns

All Official Use Only content has been replaced with ≡.

21.7.4.1  (01-01-2005)
Income Taxes/Information Returns Overview

  1. This section contains information and adjustment procedures for BMF income tax and information returns. It also contains information on refundable and non-refundable credits and backup withholding on income tax returns.

21.7.4.2  (01-01-2005)
What Are the BMF Income Taxes/Information Returns Covered in This Section?

  1. The forms covered in this section are:

    • Form1041, U.S. Income Tax Return for Estates and Trusts

    • Form1065, U.S. Return of Partnership Income

    • Form1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return

    • Form1120 series, U.S. Corporation Income Tax Return

    • Form8716, Election to Have a Tax Year Other Than a Required Tax Year

    • Form8752, Required Payment or Refund Under Section 7519

    • BMF Schedule H (Form 1040), Household Employment Taxes

21.7.4.3  (07-17-2007)
Income/Information Returns Research

  1. Besides the information in this section, the specific form and corresponding instructions for that form are good sources for additional information.

  2. For Form1041, 1065, 1066, and 1120 series returns, the publications listed below can be used by taxpayers or Service employees to obtain additional information.

    • Publication 535, Business Expenses

    • Publication 538, Accounting Periods and Methods

    • Publication 544, Sales and Other Disposition of Assets

    • Publication 550, Investment Income and Expenses

    • Publication 583, Starting a Business and Keeping Records

    • Publication 908, Bankruptcy Tax Guide

    • Publication 925, Passive Activity and At-Risk Rules

    • Publication 1066, Small Business Tax Workshop (Obsolete 2/16/06)

    • Publication 1066-C, A Virtual Small Business Tax Workshop DVD

21.7.4.3.1  (07-17-2007)
Additional Form 1041 Research Material

  1. Besides the publications listed in IRM 21.7.4.3(2) above, the publications below can be sources for additional information for Form 1041 filers.

    • Publication 559, Survivors, Executors, and Administrators

    • Publication 1437, Procedures and Specifications for the 1041 e-file Program, U.S. Income Tax Return for Estates and Trusts for TY 2006

    • Publication 1438, File Specifications, Validation Criteria, and Record Layouts for the Electronic Filing Program for Form 1041 - U.S. Income Tax Return for Estates and Trusts for Tax Year 2006

    • Publication 1438-A, (Supplement) for the 1041 e-file Program U.S. Income Tax Return for Estates and Trusts for Tax Year 2006

  2. There are various methods to obtain Publications 1437 or 1438:

    • Access the IRS Internet Website @ http://www.irs.ustreas.gov

    • Call the Forms Line toll-free at 1-800-829-3676.

    • Call the e-Help Desk toll-free at 1-866-255-0654.

    • Write to IRS at the following address:

      Ogden Submission Processing Campus
      Stop 6052
      1160 West 1200 South
      Ogden, UT 84201

  3. For Form 1041 domestic (household) employers who must file Schedule H, the publications below can be used.

    • Publication 926, Household Employer's Tax Guide

21.7.4.3.2  (07-17-2007)
Additional Form 1065 Research Material

  1. Besides the publications listed in IRM 21.7.4.3(2) above, the publications below can be sources for additional information for Form 1065 filers.

    • Publication 541, Partnerships

    • Publication 1524, Procedures for the 1065 e-file Program - U.S. Return of Partnership Income For Tax Year 2006 (or 2007).

    • Publication 1525, File Specifications, Validation Criteria and Record Layouts for the 1065 e-file Program - U.S. Return of Partnership Income for Tax Year 2006 (or 2007).

    • Publication 3225, Test Package for Electronic Filers of U.S. Partnership Return of Income is no longer available (Obsolete 07-19-2004). See Section 8 of Publication 1524 for information on the testing process.

    • Publication 3416, 1065 e-file Program - U.S. Return of Partnership Income for Tax Year 2006 (or 2007) - Publication 1525 Supplement.

  2. To obtain Publications 1524 or 1525, the same sources as those detailed in IRM 21.7.4.3.1(2) above, can be used.

21.7.4.3.3  (01-01-2005)
Additional Form 1066 Research Material

  1. Besides the publications listed in IRM 21.7.4.3(2) above, the publications below can be sources for additional information for Form 1066 filers.

    • Publication564, Mutual Fund Distributions

    • Publication938, Real Estate Mortgage Investment Conduits Reporting Information (This publication contains a directory of REMICs. It is not printed, but is available on CD-ROM or the Internet.)

21.7.4.3.4  (01-01-2005)
Additional Form 1120 Series Research Material

  1. Besides the publications listed in IRM 21.7.4.3(2) above, Publication542, Corporations, can be used as an additional source of information for Form 1120 filers.

  2. Also, see Instructions for each specific type of Form 1120 series return for additional information.

21.7.4.3.5  (07-17-2007)
Revised Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information, and Other Returns

  1. Beginning January 1, 2006, IRS consolidated Forms 2758, 7004, 8736 and 8800. New revised Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information, and Other Returns, is now used to file the following Forms:

    Form 7004 Extension Requests
    Extension is For Form MFT Form Code Extension is For Form MFT Form Code
    706-GS(D) 78 01 1120-L 02 18
    706-GS(T) 77 02 1120-ND 02 19
    Note: Form 990-C has been replaced by Form 1120-C. 1120-ND (Section 4951 Taxes) 02 20
    1041 (Estate) 05 04 1120-PC 02 21
    1041 (Trust) 05 05 1120-POL 02 22
    1041-N 05 06 1120-REIT 02 23
    1041-QFT 05 07 1120-RIC 02 24
    1042 12 08 1120S 02 25
    1065 06 09 1120-SF 02 26
    1065-B 06 10 3520-A 42 27
    1066 07 11 8612 89 NMF 28
    1120 02 12 8613 14 NMF 29
    1120 (Subchapter T Cooperative) 02 13 8725 27 NMF 30
    1120-A 02 14 8804 08 31
    1120-C 02 34 8831 89 NMF 32
    1120-F 02 15 8876 27 NMF 33
    1120-FSC 02 16      
    1120-H 02 17      

  2. Form 7004 is processed to BMF as Transaction Code 620 with Document Code 04. Form 7004 received without remittance posts as $.00. In addition, when the TC 620 posts to the account, IDRS generates TC 460 on the module.

  3. Unless Computer Condition Code (CCC) "L" is present, the computer generated extended return due date is six-months from the original return due date. If CCC "L" is present, then the extended return due date is the original return due date (no extension granted).

  4. Taxpayers who incorrectly file Forms 2758, 8736, or 8800 will have the form converted to the new Form 7004 format and it will be processed as a Form 7004.

  5. See IRM 3.11.212, Application for Extension of Time To File Tax Returns, for additional information. Also, follow the procedures in IRM 20.1.2.1.2.1(11), Extension of Time to File, when the taxpayer claims they filed a timely extension.

21.7.4.4  (01-01-2005)
Income and Information Returns Procedures

  1. Use the following information and procedures for the designated forms.

21.7.4.4.1  (01-01-2005)
Form 1041, U.S. Income Tax Return for Estates and Trusts

  1. Form 1041 is filed to report the income of an estate or trust as reported by a fiduciary. The MFT is 05 and the tax class is "2" . It covers a calendar or fiscal year not exceeding 12 months. The return is due on or before the 15th day of the fourth month following the close of the taxable year. Every Form 1041 is edited with a Fiduciary Code and may have a Trust Code. However, amended returns are not coded. See IRM 3.11.14.15, Section "A" - Fiduciary & Trust Code Editing.

21.7.4.4.1.1  (01-01-2005)
Filing Requirements, Form 1041

  1. The fiduciaries for certain domestic decedent and bankruptcy estates and certain domestic trusts are required to file Form 1041.

21.7.4.4.1.1.1  (07-17-2007)
Domestic Decedent and Bankruptcy Estates

  1. A domestic decedent’s estate is a taxable entity separate from the decedent and comes into being with the death of the individual. It exists until the final distribution of its assets to the heirs and other beneficiaries. The income earned by the assets during this period must be reported by the estate under the conditions described in Publication 559, Survivors, Executors, and Administrators. The personal representative of a domestic decedent’s estate which meets either of the criteria below, must file Form 1041:

    • Gross income of $600 or more for the taxable year

    • Any beneficiary who is a non-resident alien

  2. A bankruptcy estate is a separate and distinct taxable entity from the individual debtor. For more information, refer to Publication 908, Bankruptcy Tax Guide. A bankruptcy estate is created when an individual is a debtor in bankruptcy under Chapter 7 or Chapter 11 of Title 11 of the United States Code. The bankruptcy trustee or debtor-in-possession must file Form 1041 if the estate has:

    For Tax Year Beginning In Gross Income Of
    2002 $6,925
    2003 $7,800
    2004 $7,950
    2005 $8,200
    2006 $8,450

21.7.4.4.1.1.2  (01-01-2005)
Domestic Trusts

  1. A trust is an arrangement in which one party (the trustee) takes title to property for the benefit of another party or parties (beneficiaries). Trustees manage and control the property, but are under a duty to administer the trust according to the trust agreement or local law for the benefit of the beneficiaries.

  2. A trust may be created during an individual's life ( inter vivos ), or at the time of their death, under a will (testamentary).

  3. Domestic trusts which meet any of the criteria below must file Form 1041:

    • Any taxable income for the taxable year

    • Gross income of $600 or more, regardless of the amount of taxable income

    • Any beneficiary who is a non-resident alien

21.7.4.4.1.1.3  (07-17-2007)
Types of Trusts

  1. A simple trust is created by a written document. A simple trust is one which requires all income to be distributed currently, has no authority to make charitable contributions and (during the taxable year in question) does not distribute any amount allocated to the corpus of the trust.

  2. A complex trust is created by a written document. It is one which, for the taxable year, does not qualify as a simple trust. It may or may not distribute current income, principal, or make charitable contributions depending upon its terms.

  3. A grantor trust can be set up by a person, an organization, or, in certain cases, created by a will. The income from the trust is taxable to the grantor or other person treated as the owner of the trust. The income, deductions, and credits are not reported on the Form 1041. They are shown on a separate statement which is attached to the Form 1041. Grantor trusts have many unique characteristics. Among them:

    1. The trustee of certain grantor trusts may elect an alternative reporting method under Regulation 1.671-4. Generally, these trusts report by issuing a Form 1099 reporting the trust income and showing the grantor or other person treated as owner of the trust as payee.

    2. A trust may be a partial grantor trust if the power which would make the trust a grantor trust only applies to a portion of the trust assets. The grantor trust portion must report under the general grantor trust rules, and the non-grantor trust portion should report as a simple or complex trust depending on its provisions.

  4. A pooled income fund is one type of split interest trust with a remainder interest for a public charity and a life income interest retained by a donor or for another person. It is not exempt from tax under IRC Section 501 (a). A Form 5227 (Split Interest Trust Information Return) must also be filed by the fiduciary in addition to Form 1041.

  5. A Qualified Revocable Trust is any trust (or part of a trust) that, on the day the decedent died, was treated as owned by the decedent under section 676. The grantor of the trust pays taxes on the trust on their Form 1040 return. The trustee files Form 1041 for "informational purposes" only. The trustees of each qualified revocable trust and the executor of the related estate (if one exists), use Form 8855, Election to Treat a Qualified Revocable Trust as Part of an Estate, to make a section 645 election. This election allows a qualified revocable trust to be treated and taxed (for income tax purposes) as part of its related estate (Form 706) during the election period and cannot be revoked once the election is made. See the Instructions to Form 8855 for more information.

  6. Qualified Funeral Trust - See IRM 21.7.4.4.1.1.4.

  7. Alaskan Settlement Trust - See IRM 21.7.4.4.1.1.5.

  8. Electing Small Business Trusts (ESBTs) are treated as two separate trusts for purposes of determining income tax. The portion of an ESBT that consists of stock in one or more S corporations (the S portion) is treated as one trust. The portion that consists of all other assets in the trust is treated as a separate trust. The grantor or another person may be treated as the owner of all, or a portion of either of both trusts, under subpart E (grantor portion).

  9. Qualified Disability Trust - See IRM21.7.4.4.1.1.6.

  10. See IRM3.11.14.2 for more general definitions relating to trusts and estates.

21.7.4.4.1.1.4  (01-11-2007)
Qualified Funeral Trusts, Form 1041-QFT

  1. The Taxpayer Relief Act of 1997 (TRRA) resulted in the establishment of Form1041-QFT. These trusts are created by a contract with a trade or business providing funeral or burial services.

  2. The sole purpose of the trust is to hold, invest, and reinvest funds in the trust and to use those funds to make payments for funeral or burial services for the beneficiaries of the trust. No exemptions are allowed. A threshold for aggregate contributions is adjusted each year based on cost of living adjustments. Use the table below to determine the contribution limit.

    For contracts entered in Your contribution limit amount is
    2002 $7,700
    2003 $7,800
    2004 $8,000
    2005 $8,200
    2006 $8,500
    2007 $8,800

  3. This form is applicable for tax years ending after August 5,1997. (Since these trusts are required to file on a calendar year basis, the first returns were for period ending December 31, 1997.)

  4. Domestic Forms 1041-QFT are processed at the Cincinnati Submission Processing Campus and all International Forms 1041-QFT are processed at the Ogden Submission Processing Campus. The MFT is 05, Doc Code 39, and FRC 9.

  5. Form 1041-QFT ES payments are determined individually for each trust reported on a composite (more than one trust involved) Form 1041-QFT. The ES payments are not based on the total taxable income for all trusts reported on the form. Some taxpayers were assessed incorrect ES penalties since the computer based the computation on the total taxable income. If a phone call or correspondence is received from a taxpayer stating an incorrect ES penalty was assessed:

    1. Abate the entire penalty if the taxpayer states they are not required to make ES payments, since the individual trusts were under the current $1,000 threshold for making payments.

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    5. Use reason code 45 in the fourth position and apologize to the taxpayer by phone or via Letter 544C.

21.7.4.4.1.1.5  (01-01-2005)
Alaska Native Settlement Trusts, Form 1041-N

  1. Section 671 of the Economic Growth and Tax Relief Reconciliation Act of 2001 resulted in the creation of Form1041-N and Section 646 of the IRC.

  2. The provision allows Alaska Native Settlement Trusts (currently numbering approximately 20) to elect special tax treatment for the trust and its beneficiaries. That is, the trust pays the tax on all income and, therefore distributions of income are generally tax exempt for the beneficiaries. In certain cases, trust distributions are treated as taxable dividends for the sponsoring Native Corporation. See the table below for the tax rates on ordinary income and capital gains. These trusts are not subject to alternative minimum tax. It is believed all these trusts are calendar year filers.

    Year Ordinary Income Capital Gains
    2002 10% 10% (8% for qualified 5-year property)
    2003 10%

    • 10% (8% for qualified 5-year property) on gains for taxable years ending prior to May 6, 2003.

    • 5% for post May 5, 2003.
    2004 - 2006 10% 5%

    Note:

    See the instructions for Schedule D (Form 1041) for taxable years that include May 6, 2003.

  3. All Forms 1041-N are processed at the Ogden Submission Processing Center. The volume is minimal. Forms 1041-N are processed as a Form 1041-QFT (Document Code "39" , MFT "05" , Tax Class "2" ). The only unique identifying field that differentiates the two returns is audit code "8" on the 1041-N account.

21.7.4.4.1.1.6  (01-01-2005)
Qualified Disability Trust

  1. A Qualified Disability Trust is any trust:

    • Described in 42 U.S.C. 1396p(c)(2)(B)(iv) and established solely for the benefit of an individual under 65 years of age who is disabled, and

    • All of the beneficiaries of which are determined by the Commissioner of Social Security, to have been disabled for some part of the tax year within the meaning of 42 U.S.C. 1382(c)(a)(3)

  2. The Victims of Terrorism Tax Relief Act of 2001, provides that certain disability trusts may claim a personal exemption in an amount that is based upon the personal exemption provided for individuals under section 151(d), rather than the $100 or $300 personal exemption provided under current law.

  3. See IRM 21.7.4.4.1.7.3, Form 1041 Exemptions, for the exemption amount and phaseout thresholds for Qualified Disability Trusts.

21.7.4.4.1.2  (01-01-2005)
Schedules Associated with Form 1041

  1. The schedules listed below are associated with Form 1041.

    • Schedule A - Charitable Deductions

    • Schedule B - Income Distribution Deduction

    • Schedule D - Capital Gains and Losses (This schedule must be attached if the alternative tax computation is used.)

    • Schedule G - Tax Computation

    • Schedule H, Form 1040 - Household Employment Taxes (1995 and subsequent)

    • Schedule I - Alternative Minimum Tax. (This was previously reported as Schedule H. However, beginning in tax year 1995, it was renamed Schedule I to accommodate the new Schedule H, Household Employment Taxes.)

    • Schedule J - Accumulation Distribution for a Complex Trust

    • Schedule K-1 - Beneficiary’s Share of Income, Deductions, Credits, etc. (Trusts and estates are required to file Schedules K-1 for each beneficiary named on Form 1041.)

21.7.4.4.1.3  (01-01-2006)
General Definitions

  1. The following list contains and defines common terms used with Form 1041.

    • Administrator - The person in charge of administering an estate who has been named by the courts when there is no will, or if no executor was named in the will, or if the named executor cannot or will not serve.

    • Beneficiary - A person designated as the recipient of funds or other property under a trust or an estate.

    • Conservatory - An arrangement to hold property, usually for an incompetent person, which may or may not be a trust for federal purposes.

    • Estate - A legal entity created as a result of a person's death. The estate consists of the real and/or personal property of the deceased person.

    • Fiduciary - Trustee of a trust or executor, executrix, administrator, administratrix, personal representative, or person in possession of property of a decedent's estate.

    • Guardianship/Custodianship - An arrangement to hold property for a minor, which may or may not be a trust for federal purposes.

    • Maker/grantor/etc - The person/organization which originated the trust or which has control over the trust.

    • Trust - A legal entity created under state law and taxed under federal law. The trust can be created to do one act or a series of acts.

21.7.4.4.1.4  (01-01-2005)
Entity Perfection of Forms 1041

  1. A single individual or group may set up several trusts. These trusts may have names or structures almost identical.

    Example:

    John Smith Trust #1 and John Smith Trust #2 are separate trusts.

  2. Mix-ups between these entities frequently occur since a single individual or firm usually administers both trusts. To resolve these cases:

    1. Determine the correct entities from information available.

    2. If the correct entity cannot be determined, forward a photocopy of the front page (entity portion) including available research, and a photocopy of any other document in the case file that may help determine the correct entity, to Entity Control.

    3. Maintain an open control base until the case is returned and proper adjustment is completed.

21.7.4.4.1.5  (01-01-2005)
Permissible Tax Years, Form 1041

  1. Most trusts are required to file a calendar year return.

  2. The only Form 1041 filers permitted to retain or adopt a fiscal year are:

    • Decedent’s estates

    • Bankruptcy estates

    • Charitable trusts under IRCsection 4947(a)(1)

    • Trusts under IRCsection 501(a)

    • Trusts treated as wholly owned by a grantor under rules of IRCsections 671 - 679 (which use the tax year of their owner)

    • Trusts who apply for benefits under IRC443(b)(2)

    • Alaska Native Settlement Trusts

  3. To change the accounting period of an estate, a Form1128, Application to Adopt, Change or Retain a Tax Year, must be filed and approved.

  4. The bankruptcy estate of an individual in a Chapter 7 or Chapter 11 case may change its accounting period one time without approval.

21.7.4.4.1.6  (01-12-2006)
Extensions to File, Form 1041

  1. An extension of time to file Form 1041 must be filed on or before the due date of the Form 1041. The extension of time to file a return does not extend the time for payment of tax. Therefore, to avoid interest charges and a late payment penalty, the total tax due must be paid when the extension request is filed.

  2. Beginning January 1, 2006, IRS consolidated Forms 2758, 7004, 8736 and 8800. New revised Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information, and Other Returns, is now used to file for an extension on Form 1041. See IRM 21.7.4.3.5, Revised Form 7004, for additional information.

  3. Prior to January 1, 2006, the forms used to file for an extension of time to file on Form 1041 were:

    • Estates - Form 2758, Application for Extension of Time To File Certain Excise, Income, Information, and Other Returns

    • Trusts - Form 8736, Application for Automatic Extension of Time to File U.S. Return for a Partnership, REMIC, or for Certain Trusts

    • Trusts which needed an additional extension of up to three months - Form 8800, Application for Additional Extension of Time To File U.S. Return for a Partnership, REMIC, or for Certain Trusts (Form 8800 must be filed by the extended due date of Form 1041.)

21.7.4.4.1.7  (01-11-2007)
Tax Computation, Form 1041

  1. The method of calculating the liability using Form 1041 varies depending on the type of taxpayer involved.

  2. Decedent’s estates and trusts compute their income tax liability using the rates in the table below. The taxpayer enters the computed tax liability on line 1a of Schedule G. Follow the Schedule G submitted by the taxpayer as there can be other credits or taxes applicable. The total from line 7, Schedule G is the amount entered on the "Total tax" line (line 23 for 2006) on Form 1041.

    TAX RATE SCHEDULES
    2004 Tax Rate Schedule
    If the taxable income on Page 1, Line 22 is over: But not over: The tax is: Of the amount over:
    $0 $1,950 15% $0
    1,950 4,600 $292 + 25% 1,950
    4,600 7,000 955 + 28% 4,600
    7,000 9,550 1,627 + 33% 7,000
    9,550 ------- 2,468.50 + 35% 9,550
    2005 Tax Rate Schedule
    If the taxable income on Page 1, Line 22 is over: But not over: The tax is: Of the amount over:
    $0 $2,000 15% $0
    2,000 4,700 $300 + 25% 2,000
    4,700 7,150 975 + 28% 4,700
    7,150 9,750 1,661 + 33% 7,150
    9,750 ------- 2,519 + 35% 9,750
    2006 Tax Rate Schedule
    If the taxable income on Page 1, Line 22 is over: But not over The tax is Of the amount over
    $0 $2,050 15% $0
    2,050 4,850 $307.50 + 25% 2,050
    4,850 7,400 $1,007.50 + 28% 4,850
    7,400 10,050 $1,721.50 + 33% 7,400
    10,050 --------- $2,596 + 35% 10,050
    2007 Tax Rate Schedule
    If the taxable income on Page 1, Line 22 is over: But not over The tax is Of the amount over