What must a trustee report to the IRS on an annual basis regarding the trust's financial activities?

The correct answer is Form 1041, which is specifically designated for reporting the income, deductions, gains, losses, and other financial activities of a trust or estate. A trustee has the responsibility to file this form annually to report the trust’s financial information to the IRS. It is essential for tax purposes, as it helps determine how much tax the trust owes or the extent of any distributions to beneficiaries that may be taxable.

The other forms mentioned serve different purposes. Form 1040 is used by individuals to file their annual income tax returns. Form 1099 is typically used to report various forms of income other than wages, salaries, and tips. Form 1120 is the corporate tax return that corporations file. Therefore, while these forms are critical for different tax responsibilities, Form 1041 is the only one specifically applicable for the reporting activities of trusts.