Any assets you put in an irrevocable trust no longer belong to you. They belong to the trust, which as far as the law is concerned, is a separate entity. Unlike with a revocable trust, it's nearly impossible to get the assets back. The trust, not you, pays the income tax on whatever income its property generates.
The income tax rules for trusts work pretty much the same as the rules you use for your 1040. The trust takes any income it earned this year -- capital gains, interest, dividends -- and subtracts any expenses and deductions. It reports the total as taxable income. The trustee you appointed to manage the assets handles the taxes along with the trust's other affairs. Unlike with a revocable trust, you typically need to appoint someone besides yourself for the job, so that you can show you don't control the assets.
One deduction available to trusts but not to you occurs when one of the beneficiaries takes money out. If you set up the trust to manage money for a minor, for instance, he or his guardian may make regular withdrawals from the trust for support funds. The money distributed from the trust gives the trust a tax deduction. If the beneficiary received $10,000 this year, for instance, that's a $10,000 write-off.
The IRS expects your trust to pay tax in advance. As there's no employer to withhold money, the trust pays estimated tax, as self-employed individuals do. Roughly every quarter, the trustee adds up the trust's income for the year to date, figures the tax and writes the IRS a check. When next year rolls around, the trustee recalculates total tax for the year and sends in more money if she underpaid.
The trustee usually uses the same calendar year for trust taxes as a regular taxpayer does. He has the choice of calculating taxable income using the cash method or the accrual method. Cash method measures money actually received or spent. Accrual includes income the trust has earned, even if it hasn't been paid yet. The trustee reports the trusts finances on IRS form 1041. If he distributed income to beneficiaries, he reports the disbursals on Schedule B.