Period Covered

File the 2002 return for calendar year 2002 and fiscal years beginning in 2002 and ending in 2003. If the return is for a fiscal year or a short tax year (less than 12 months), fill in the tax year space at the top of the form.

The 2002 Form 1041 may also be used for a tax year beginning in 2003 if:

1. The estate or trust has a tax year of less than 12 months that begins and ends in 2003 and
2. The 2003 Form 1041 is not available by the time the estate or trust is required to file its tax return. However, the estate or trust must show its 2003 tax year on the 2002 Form 1041 and incorporate any tax law changes that are effective for tax years beginning after December 31, 2002.

Who Must Sign

Fiduciary

The fiduciary, or an authorized representative, must sign Form 1041.

A financial institution that submitted estimated tax payments for trusts for which it is the trustee must enter its employer identification number (EIN) in the space provided for the EIN of the fiduciary. Do not enter the EIN of the trust. For this purpose, a financial institution is one that maintains a Treasury Tax and Loan account. If you are an attorney or other individual functioning in a fiduciary capacity, leave this space blank. Do not enter your individual social security number (SSN).

If you, as fiduciary, fill in Form 1041, leave the Paid Preparer's space blank. If someone prepares this return and does not charge you, that person should not sign the return.

Paid Preparer

Generally, anyone who is paid to prepare a tax return must sign the return and fill in the other blanks in the Paid Preparer's Use Only area of the return.

The person required to sign the return must complete the required preparer information and:

• Sign it in the space provided for the preparer's signature. A facsimile signature is acceptable if certain conditions are met. See Regulations section 1.6695-1(b)(4)(iv) for details.
• Give you a copy of the return in addition to the copy to be filed with the IRS.

Paid Preparer Authorization

If the fiduciary wants to allow the IRS to discuss the estate's or trust's 2002 tax return with the paid preparer who signed it, check the Yes box in the signature area of the return. This authorization applies only to the individual whose signature appears in the Paid Preparer's Use Only section of the estate's or trust's return. It does not apply to the firm, if any, shown in that section.

If the Yes box is checked, the fiduciary is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of the estate's or trust's return. The fiduciary is also authorizing the paid preparer to:

• Give the IRS any information that is missing from the estate's or trust's return,
• Call the IRS for information about the processing of the estate's or trust's return or the status of its refund or payment(s), and
• Respond to certain IRS notices that the fiduciary has shared with the preparer about math errors, offsets, and return preparation. The notices will not be sent to the preparer.

The fiduciary is not authorizing the paid preparer to receive any refund check, bind the estate or trust to anything (including any additional tax liability), or otherwise represent the estate or trust before the IRS. If the fiduciary wants to expand the paid preparer's authorization, see Pub. 947, Practice Before the IRS and Power of Attorney.

The authorization cannot be revoked. However, the authorization will automatically end no later than the due date (without regard to extensions) for filing the estate's or trust's 2003 tax return.

Accounting Methods

Figure taxable income using the method of accounting regularly used in keeping the estate's or trust's books and records. Generally, permissible methods include the cash method, the accrual method, or any other method authorized by the Internal Revenue Code. In all cases, the method used must clearly reflect income.

Generally, the estate or trust may change its accounting method (for income as a whole or for any material item) only by getting consent on Form 3115, Application for Change in Accounting Method. For more information, see Pub. 538, Accounting Periods and Methods.

Accounting Periods

For a decedent's estate, the moment of death determines the end of the decedent's tax year and the beginning of the estate's tax year. As executor or administrator, you choose the estate's tax period when you file its first income tax return. The estate's first tax year may be any period of 12 months or less that ends on the last day of a month. If you select the last day of any month other than December, you are adopting a fiscal tax year.

To change the accounting period of an estate, get Form 1128, Application To Adopt, Change, or Retain a Tax Year.

Generally, a trust must adopt a calendar year. The following trusts are exempt from this requirement:

• A trust that is exempt from tax under section 501(a);
• A charitable trust described in section 4947(a)(1); and
• A trust that is treated as wholly owned by a grantor under the rules of sections 671 through 679.

Rounding Off to Whole Dollars

You may show the money items on the return and accompanying schedules as whole-dollar amounts. To do so, drop amounts less than 50 cents and increase any amounts from 50 to 99 cents to the next dollar.

Estimated Tax

Generally, an estate or trust must pay estimated income tax for 2003 if it expects to owe, after subtracting any withholding and credits, at least $1,000 in tax, and it expects the withholding and credits to be less than the smaller of:

1. 90% of the tax shown on the 2003 tax return or
2. 100% of the tax shown on the 2002 tax return (110% of that amount if the estate's or trust's adjusted gross income on that return is more than $150,000, and less than 2/3 of gross income for 2002 or 2003 is from farming or fishing).

However, if a return was not filed for 2002 or that return did not cover a full 12 months, item 2 does not apply.

For this purpose, include household employment taxes in the tax shown on the tax return, but only if either of the following is true:

• The estate or trust will have Federal income tax withheld for 2003 (see the instructions on page 18 for line 24e) or
• The estate or trust would be required to make estimated tax payments for 2003 even if it did not include household employment taxes when figuring estimated tax.

Exceptions

Estimated tax payments are not required from:

1. An estate of a domestic decedent or a domestic trust that had no tax liability for the full 12-month 2002 tax year;
2. A decedent's estate for any tax year ending before the date that is 2 years after the decedent's death; or
3. A trust that was treated as owned by the decedent if the trust will receive the residue of the decedent's estate under the will (or if no will is admitted to probate, the trust primarily responsible for paying debts, taxes, and expenses of administration) for any tax year ending before the date that is 2 years after the decedent's death.

For more information, see Form 1041-ES, Estimated Income Tax for Estates and Trusts.

Electronic Deposits

A financial institution that maintains a Treasury Tax and Loan (TT&L) account, and acts as a fiduciary for at least 200 taxable trusts that are required to pay estimated tax, may be required to deposit the estimated tax payments electronically using the Electronic Federal Tax Payment System (EFTPS). The electronic deposit requirement applies in 2003 if:

• The total deposits of depository taxes (such as estimated, employment, or excise tax) in 2001 were more than $200,000 or
• The fiduciary (on behalf of a trust) was required to use EFTPS in 2002.

If the fiduciary is required to use EFTPS on behalf of a trust and fails to do so, it may be subject to a 10% penalty.

A fiduciary that is not required to make electronic deposits of estimated tax on behalf of a trust may either use the payment vouchers (see Form 1041-ES) or voluntarily participate in EFTPS. To enroll in or get more information about EFTPS, call 1-800-555-4477 or 1-800-945-8400.

Depositing on time.   For deposits made by EFTPS to be on time, the fiduciary must initiate the transaction at least 1 business day before the date the deposit is due.

Section 643(g) Election

Fiduciaries of trusts that pay estimated tax may elect under section 643(g) to have any portion of their estimated tax payments allocated to any of the beneficiaries.

The fiduciary of a decedent's estate may make a section 643(g) election only for the final year of the estate.

See the instructions for line 24b on page 18 for more details.

Interest and Penalties

Interest

Interest is charged on taxes not paid by the due date, even if an extension of time to file is granted.

Interest is also charged on the failure-to-file penalty, the accuracy-related penalty, and the fraud penalty. The interest charge is figured at a rate determined under section 6621.

Late Filing of Return

The law provides a penalty of 5% of the tax due for each month, or part of a month, the return is not filed up to a maximum of 25% of the tax due. If the return is more than 60 days late, the minimum penalty is the smaller of $100 or the tax due. The penalty will not be imposed if you can show that the failure to file on time was due to reasonable cause. If the failure is due to reasonable cause, attach an explanation to the return.

Late Payment of Tax

Generally, the penalty for not paying tax when due is ½ of 1% of the unpaid amount for each month or part of a month it remains unpaid. The maximum penalty is 25% of the unpaid amount. The penalty applies to any unpaid tax on the return. Any penalty is in addition to interest charges on late payments.

If you include interest or either of these penalties with your payment, identify and enter these amounts in the bottom margin of Form 1041, page 1. Do not include the interest or penalty amount in the balance of tax due on line 27.

Failure To Provide Information Timely

You must provide Schedule K-1 (Form 1041), on or before the day you are required to file Form 1041, to each beneficiary who receives a distribution of property or an allocation of an item of the estate.

For each failure to provide Schedule K-1 to a beneficiary when due and each failure to include on Schedule K-1 all the information required to be shown (or the inclusion of incorrect information), a $50 penalty may be imposed with regard to each Schedule K-1 for which a failure occurs. The maximum penalty is $100,000 for all such failures during a calendar year. If the requirement to report information is intentionally disregarded, each $50 penalty is increased to $100 or, if greater, 10% of the aggregate amount of items required to be reported, and the $100,000 maximum does not apply.

The penalty will not be imposed if the fiduciary can show that not providing information timely was due to reasonable cause and not due to willful neglect.

Underpaid Estimated Tax

If the fiduciary underpaid estimated tax, use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to figure any penalty. Enter the amount of any penalty on line 26, Form 1041.

Trust Fund Recovery Penalty

This penalty may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid. These taxes are generally reported on Forms 720, 941, 943, or 945. The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible for collecting, accounting for, or paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax. See the instructions for Form 720, Pub. 15 (Circular E), Employer's Tax Guide, or Pub. 51 (Circular A), Agricultural Employer's Tax Guide, for more details, including the definition of responsible persons.

Other Penalties

Other penalties can be imposed for negligence, substantial understatement of tax, and fraud. See Pub. 17, Your Federal Income Tax, for details on these penalties.

Other Forms That May Be Required

Forms W-2   and W-3, Wage and Tax Statement; and Transmittal of Wage and Tax Statements.

Form 56,   Notice Concerning Fiduciary Relationship.

Form 706,   United States Estate (and Generation-Skipping Transfer) Tax Return; or Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return, Estate of nonresident not a citizen of the United States.

Form 706-GS(D),   Generation-Skipping Transfer Tax Return For Distributions.

Form 706-GS(D-1),   Notification of Distribution From a Generation-Skipping Trust.

Form 706-GS(T),   Generation-Skipping Transfer Tax Return for Terminations.

Form 720,   Quarterly Federal Excise Tax Return. Use Form 720 to report environmental excise taxes, communications and air transportation taxes, fuel taxes, luxury tax on passenger vehicles, manufacturers' taxes, ship passenger tax, and certain other excise taxes.

Caution:   See Trust Fund Recovery Penalty above.

Form 926,   Return by a U.S. Transferor of Property to a Foreign Corporation. Use this form to report certain information required under section 6038B.

Form 940   or Form 940-EZ, Employer's Annual Federal Unemployment (FUTA) Tax Return. The estate or trust may be liable for FUTA tax and may have to file Form 940 or 940-EZ if it paid wages of $1,500 or more in any calendar quarter during the calendar year (or the preceding calendar year) or one or more employees worked for the estate or trust for some part of a day in any 20 different weeks during the calendar year (or the preceding calendar year).

Form 941,   Employer's Quarterly Federal Tax Return. Employers must file this form quarterly to report income tax withheld on wages and employer and employee social security and Medicare taxes. Agricultural employers must file Form 943, Employer's Annual Tax Return for Agricultural Employees, instead of Form 941, to report income tax withheld and employer and employee social security and Medicare taxes on farmworkers.

Caution:   See Trust Fund Recovery Penalty above.

Form 945,   Annual Return of Withheld Federal Income Tax. Use this form to report income tax withheld from nonpayroll payments, including pensions, annuities, IRAs, gambling winnings, and backup withholding.

Caution:   See Trust Fund Recovery Penalty above.

Form 1040,   U.S. Individual Income Tax Return.

Form 1040NR,   U.S. Nonresident Alien Income Tax Return.

Form 1041-A,   U.S. Information Return - Trust Accumulation of Charitable Amounts.

Forms 1042   and 1042-S, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons; and Foreign Person's U.S. Source Income Subject to Withholding. Use these forms to report and transmit withheld tax on payments or distributions made to nonresident alien individuals, foreign partnerships, or foreign corporations to the extent such payments or distributions constitute gross income from sources within the United States that is not effectively connected with a U.S. trade or business. For more information, see sections 1441 and 1442, and Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

Forms 1099-A, B, INT, LTC, MISC, Archer MSA, OID, R, and S.   You may have to file these information returns to report acquisitions or abandonments of secured property; proceeds from broker and barter exchange transactions; interest payments; payments of long-term care and accelerated death benefits; miscellaneous income payments; distributions from an Archer MSA or Medicare + Choice MSA; original issue discount; distributions from pensions, annuities, retirement or profit-sharing plans, IRAs (including SEPs, SIMPLEs, Roth IRAs, Roth Conversions, and IRA recharacterizations), Coverdell ESAs, insurance contracts, etc.; and proceeds from real estate transactions.

Also, use certain of these returns to report amounts received as a nominee on behalf of another person, except amounts reported to beneficiaries on Schedule K-1 (Form 1041).

Form 8275,   Disclosure Statement. File Form 8275 to disclose items or positions, except those contrary to a regulation, that are not otherwise adequately disclosed on a tax return. The disclosure is made to avoid parts of the accuracy-related penalty imposed for disregard of rules or substantial understatement of tax. Form 8275 is also used for disclosures relating to preparer penalties for understatements due to unrealistic positions or disregard of rules.

Form 8275-R,   Regulation Disclosure Statement, is used to disclose any item on a tax return for which a position has been taken that is contrary to Treasury regulations.

Forms 8288   and 8288-A, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests; and Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. Use these forms to report and transmit withheld tax on the sale of U.S. real property by a foreign person. Also, use these forms to report and transmit tax withheld from amounts distributed to a foreign beneficiary from a U.S. real property interest account that a domestic estate or trust is required to establish under Regulations section 1.1445-5(c)(1)(iii).

Form 8300,   Report of Cash Payments Over $10,000 Received in a Trade or Business. Generally, this form is used to report the receipt of more than $10,000 in cash or foreign currency in one transaction (or a series of related transactions).

Form 8865,   Return of U.S. Persons With Respect to Certain Foreign Partnerships. The estate or trust may have to file Form 8865 if it:

1. Controlled a foreign partnership (i.e., owned more than a 50% direct or indirect interest in a foreign partnership).
2. Owned at least a 10% direct or indirect interest in a foreign partnership while U.S. persons controlled that partnership.
3. Had an acquisition, disposition, or change in proportional interest in a foreign partnership that:
   1. Increased its direct interest to at least 10%;
   2. Reduced its direct interest of at least 10% to less than 10%; or
   3. Changed its direct interest by at least a 10% interest.
4. Contributed property to a foreign partnership in exchange for a partnership interest if:
   1. Immediately after the contribution, the estate or trust owned, directly or indirectly, at least a 10% interest in the foreign partnership or
   2. The fair market value of the property the estate or trust contributed to the foreign partnership in exchange for a partnership interest, when added to other contributions of property made to the foreign partnership during the preceding 12-month period, exceeds $100,000.

Also, the estate or trust may have to file Form 8865 to report certain dispositions by a foreign partnership of property it previously contributed to that foreign partnership if it was a partner at the time of the disposition.

For more details, including penalties for failing to file Form 8865, see Form 8865 and its separate instructions.

Tax shelter disclosure statement.   For each reportable tax shelter transaction entered into prior to January 1, 2003, in which the estate or trust participated, directly or indirectly, it must attach a disclosure statement to Form 1041 for each tax year that the Federal income tax liability of the estate or trust is affected by its participation in the transaction. In addition, for the first tax year a disclosure statement is attached to Form 1041, the estate or trust must send a copy of the statement to the Internal Revenue Service, LM:PFTG:OTSA, Large & Mid-Size Business Division, 1111 Constitution Ave., N.W., Washington, DC 20224. If a transaction becomes a reportable transaction after the estate or trust files Form 1041, it must attach the statement to the following year's return (whether or not its tax liability is affected for that year). The estate or trust is considered to have indirectly participated if it participated as a partner in a partnership, shareholder in an S corporation, or if it knows or has reason to know that the tax benefits claimed were derived from a reportable transaction.

Disclosure is required for a reportable transaction that is a listed transaction. A transaction is a listed transaction if it is the same as or substantially similar to a transaction that the IRS has determined to be a tax avoidance transaction and has identified as a listed transaction by notice, regulation, or other published guidance. See Notice 2001-51, 2001-34 I.R.B. 190, for transactions identified by the IRS as listed transactions. The listed transactions identified in this notice will be updated in future published guidance.

See Temporary Regulations section 1.6011-4T for more details, including:

• Definitions of reportable transaction, listed transaction, and substantially similar.
• Form and content of the disclosure statement.
• Filing requirements for the disclosure statement.

For reportable transactions entered into after December 31, 2002, use Form 8886, Reportable Transaction Disclosure Statement, to disclose information for each reportable transaction in which the trust participated, directly or indirectly. Form 8886 must be filed for each tax year that the Federal income tax liability of the estate or trust is affected by its participation in the transaction. The following are reportable transactions.

• Any transaction the same as or substantially similar to tax avoidance transactions identified by the IRS.
• Any transaction offered under conditions of confidentiality.
• Any transaction for which the estate or trust has contractual protection against disallowance of the tax benefits.
• Any transaction resulting in a loss of at least $2 million in any single year or $4 million in any combination of years ($50,000 in any single year if the loss is generated by a section 988 transaction).
• Any transaction resulting in a book-tax difference of more than $10 million on a gross basis.
• Any transaction resulting in a tax credit of more than $250,000, if the estate or trust held the asset generating the credit for less than 45 days.

See the Instructions for Form 8886 for more details.

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