We continue our discussion of the composite Federal Form 1041QFT with a post about the individual account statement.
With the composite return, income and expenses are allocated to the individual preneed account and taxes are computed at that level rather than at the trust level. To allow the IRS to test the composite tax liabilities, the trustee is required to attach a statement to the Form 1041QFT that reflects each individual account’s share of income and expenses. The statement is required to set out each type of income, the gross amount of each type, each type of capital gain, each type of deduction or credit, the account’s gross and net income, the account’s tax liability and termination date if contract beneficiary died during the tax year. With qualified dividends and long term capital gains taxed at lower rates, the individual account statement must set out each type of income so that the IRS agent can confirm each account’s effective tax rate.
The QFT form has a composite box on line 12 that must be checked. The composite box puts the IRS agent on notice that the tax liability is not to be computed using the income and expenses entered into the 1041QFT form. (We have had IRS agents miss the box and attempt to increase the trust’s tax liability by using the 1041QFT form numbers. In each case, the issue was resolved by referencing the composite election and the individual account statement.)
We have reviewed 1041QFT returns where the individual account statement referenced a percentage, a single gross income number and the tax liability. The tax preparer obviously used a year end allocation of income and tax liabilities. Although this method does not comply with the 1041QFT instructions, the IRS may not challenge because the method frequently computes the tax liability at the higher trust tax rates.