Ways to keep your qualified settlement fund compliant

Congratulations! You won your case and created a qualified settlement fund. Your firm is overjoyed and your clients are relieved.

But wait. Are you and your new tax entity ready for tax season?

A qualified settlement fund is a unique tax entity with many benefits and an ample slate of reporting, compliance and filing requirements. You must pay careful attention to these requirements to avoid impairing the benefits of the fund.

A qualified settlement fund may be required to prepare and deliver several different types of tax forms early in 2011. These may include Forms 1098 or 1099, W2, 940, 941 and 945, and a relation-back election may be required to maximize the benefit to the defendant.

Most likely, a Form 1120-SF—the IRS income tax and informational return that must be filed by a qualified settlement fund—is due before the end of March 2011. Proper attention to the 1120-SF almost guarantees that the trust’s tax liabilities are calculated, paid, and perhaps most important of all, paid on time. The 1120-SF is required for all tax years the fund is operational.

At the same time, you should evaluate and determine the trust’s state income tax filing requirements and liabilities. If the qualified settlement fund trust is currently earning investment income, it’s a good time to project the 2011 estimated tax payments.

The IRS regulation governing qualified settlement funds is comprehensive. Are you sure that you understand the regulation well enough to properly determine taxable income and expenses?

Not all cash received by the fund is income. Not all disbursements are expenses. Not all expenses are tax-deductible. A misstep here could tie up the fund’s capital or lead to penalties for the underpayment of tax.

A professional with experience managing these many requirements is an invaluable guide. A fresh set of eyes can ensure years of seamlessly delivered benefits for you and your clients—everyone with a stake in the successful outcome of your qualified settlement fund.

The tax compliance requirements of your qualified settlement fund are exactly that – requirements. You need to demonstrate your understanding of those requirements by achieving full compliance.

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               Lordan CPA | Eden Prairie, Minnesota | chris@murraycamp.com | 952 698 2044

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