How Do I Fix Irrevocable Trust Tax Situation?
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Question:
In 2014, my wife and I became co-trustees of an irrevocable trust with our son as the beneficiary, for his future education. I have never applied for an EIN as I understood I didn’t need to file a return when its income was less than $600 in a year and it has never had interest income over $50 in a year until last year (2023). Now reading up on how to file, it looks like I should have been filing every year with any interest income. Is that correct? With no EIN number, I’m planning on filing an extension (Form 7004) stating that the EIN is being applied for, and then filing Form 1041 before the deadline on the extension runs out. How do I go about getting up to date with my obligations?
Response:
That’s a common misunderstanding, the distinction being between “gross” income and “taxable” income. Irrevocable trusts must file tax returns if they have either gross income of $600 or any taxable income. They can only avoid this obligation if they have no taxable income and their gross income is less than $600.
While your question may be better directed to an accountant, my thinking is that you don’t have correct the past, but should make things right going forward. In most cases, banks and other financial institutions require that you obtain a tax identification number before opening an account for an irrevocable trust. That does not appear to have been the case for your trust. Presumably, you used your own or our son’s Social Security number. It would be impossible or almost impossible to get a financial institution to redo its tax reporting for prior years to change 1099s issued to you or your son to new ones reporting the minimal income to the trust. If you or your son reported the income on your returns, the IRS is not worse off than if it had been reported by the trust. (In fact, you may have paid slightly more in taxes. While trust tax rates are often higher than individual tax rates, the marginal rate for so little income to the trust is probably lower than your own marginal tax rate.)
So, get a tax identification (EIN) number for the trust. The bank or financial institution where the funds are held may require you to open a new account for the trust and transfer over the funds. Then start filing 1041s beginning with the 2024 tax year.
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