Illinois Form IL-1041 has an alert code regarding the beneficiary specified on Schedule D:
Alert Code: ILSCHD-2700-3 | Category: Incorrect Data | Severity: Warning
If the beneficiary is a disregarded entity for federal income tax purposes (ex: grantor trust, single member LLC, etc), then the owner of the disregarded entity's information and designation should be entered as the beneficiary for purposes of the schedule D. Example, if the beneficiary is a grantor trust and is owned by an individual, then the beneficiary should be designated as an I for individual. This will help to insure the proper amount of pass-through withholding will be calculated for nonresident beneficiaries.
Similarly, Illinois Form IL-1120ST and IL-1065 have an alert code regarding individual members on Schedule B:
Alert Code: IL1120B-2700-4 | Category: Incorrect Data | Severity: Warning
If the partner or shareholder is a disregarded entity for federal income tax purposes (ex: grantor trust, single member LLC, etc), then the owner of the disregarded entity's information and designation should be entered as the partner or shareholder for purposes of the schedule B. Example, if the partner or shareholder is a grantor trust and is owned by an individual, then the partner or shareholder should be designated as an I for individual. This will help to insure the proper amount of pass-through withholding will be calculated for nonresident partners and shareholders.
For the beneficiaries listed on Schedule D of IL-1041, and the members listed on Schedule B of IL-1120ST or on Schedule B of IL-1065, the "Entity type" for both individuals and disregarded entities is "I". When a return receives one of these alert codes, Illinois is alerting you that if the beneficiary or member is a disregarded entity, be sure you have entered the owner's information, rather than the disregarded entity's information.
This alert is thus only important for a passthrough return with a beneficiary or member that is a disregarded entity. If all the beneficiaries or members are individuals, you can ignore the alert.