Understanding the Tax Risks Associated with Charitable Remainder Annuity Trusts

The Internal Revenue Service (IRS) has issued new final regulations labeling most Charitable Remainder Annuity Trusts (CRATs) as “listed transactions.” As a result, CRATs are now subject to additional reporting requirements. Additionally, regardless of whether taxpayers comply with their reporting obligations, using a CRAT for tax mitigation purposes could lead to invasive IRS scrutiny.

The Internal Revenue Service (IRS) has been prioritizing high-income and high-net-worth taxpayer enforcement in recent years. Most recently, the IRS has labeled most Charitable Remainder Annuity Trusts (CRATs) as “listed transactions.” This has several important implications, and taxpayers that use CRATs need to ensure that they have a clear understanding of the tax risks involved going forward. Learn more from Virginia tax evasion attorney Kevin E. Thorn, Managing Partner of Thorn Law Group:

How is the IRS Targeting Charitable Remainder Annuity Trusts?

The IRS is targeting Charitable Remainder Annuity Trusts under its “listed transactions” program. When the IRS labels a tax mitigation strategy as a “listed transaction,” this has two key implications:

• Taxpayers have additional reporting requirements; and,
• The IRS scrutinizes taxpayers’ listed transactions to determine if they constitute abusive tax schemes.

Listed transactions are not inherently unlawful. Taxpayers can conduct and report listed transactions without triggering civil or criminal penalties. However, the IRS views listed transactions as potential red flags for tax evasion and tax fraud; and, as a result, when engaging in listed transactions, taxpayers must ensure that they strictly comply with all applicable federal restrictions and requirements.

What Are the Risks of Noncompliance for Taxpayers that Use CRATS?

For U.S. taxpayers that use CRATs for tax mitigation, the risks of noncompliance can be substantial. This is true with regard to both: (i) failing to report CRATs that qualify as listed transactions; and (ii) structuring CRATs in such a way that the IRS considers them to be abusive tax shelters. The IRS has stated that it will consider a CRAT to be abusive if:

• A taxpayer transfers property with a fair market value in excess of its basis into a CRAT;
• The CRAT subsequently sells the property and uses some or all of the proceeds to purchase a single premium immediate annuity (SPIA); and,
• The taxpayer claims that the annuity is taxable, “only to the extent of the income portion of the SPIA annuity payment.”

While most IRS enforcement actions are civil in nature, the IRS can (and does) work with the U.S. Department of Justice (DOJ) to pursue criminal enforcement when warranted. If an audit or investigation uncovers evidence (or apparent evidence) of intentional tax evasion or tax fraud, this can lead to serious criminal charges that carry the potential for both fines and prison time.

Schedule a Call with Virginia Tax Evasion Attorney Kevin E. Thorn

Thorn Law Group provides experienced representation for high-income and high-net-worth taxpayers facing significant federal tax controversies. If you need to know more about the IRS’s efforts to target Charitable Remainder Annuity Trusts in 2026 (or beyond), we invite you to get in touch. To schedule a call with Virginia tax evasion attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 703-752-3752 or contact us online today.