A Court Bars Charitable Remainder Annuity Trust Scheme (CRAT)

A Court Bars Charitable Remainder Annuity Trust Scheme (CRAT)

A Permanent Bar for Promoters of a Charitable Remainder Annuity Trust Scheme

Over the past few months, there have been several investigations and criminal indictments issued against tax promoters who the Internal Revenue Service and Department of Justice believe are selling taxpayers fraudulent promotions to taxpayers, designed to artificially reduce the purchaser’s tax liability. In a recent case we wrote about the other day, the IRS alleged that some promoters were creating sham business trusts and private family foundations that were designed to reduce the income tax liability on business income generated by their clients. In the current case, The United States government takes the position that the promoters were selling false tax schemes involving Charitable Remainder Annuity Trusts (CRAT) — noting, that this type of promotion was included on the IRS’ Dirty Dozen List for 2024. Essentially in this type of tax scheme, taxpayers are led to believe that by transferring and selling property through a CRAT and purchasing a SPIA (Single Premium Immediate Annuity), they can avoid having to pay nearly any income tax post-sale, when they receive annuity payments — because they claim the majority of the money is merely return-of-basis. Let’s take a brief look at what happened in this case.

First, How Does a Charitable Remainder Trusts (CRAT) Scheme Work?

It is important to remember, that Charitable Remainder Trusts are perfectly legal and used all the time by taxpayers to donate assets, claim a deduction, and draw income (the latter which is taxable). The charitable remainder trust is an irrevocable trust, which then limits how the beneficiary is taxed since the beneficiary is not the owner of the trust. What gets the attention of the IRS is when taxpayers improperly step up the basis of the donated assets(s) to avoid having to pay any income tax on the annuity income stream.

Common Example of a Charitable Remainder Annuity Trust Scheme 

Mary owns an asset with a basis of $600,000 and a fair market value of $2,000,000. She has held the asset for many years, and now if Mary were to sell the asset outright, there would be a $1,400,000 long-term capital gain tax. And, since Mary is in the top tax bracket, she would be looking at nearly $300,000 in capital gains tax. Mary nears retirement and wants to sell the asset now (before retirement) — but is not looking to fork over $280,000 to the IRS.

Instead, taxpayers transfer the appreciated property to the CRAT and the basis is stepped up (similar to how a basis is stepped up when received by inheritance). Next, the CRAT sells the asset and purchases a Single Premium Immediate Annuity (SPIA). The taxpayer begins receiving income and only reports a small portion of the annuity payout as income because they take the position that the remainder of the distribution is simply a return of basis (which was the result of increasing the basis of property sold by the CRAT).

As provided by the Department of Justice.

Court Permanently Bars Defendants from Promoting CRATs

      • According to the United States’ amended complaint, Schreiner and Columbia CPA Group allegedly promoted the CRAT scheme in concert with other defendants. The government alleges that Schreiner falsely claimed to customers following the CRAT scheme that they could avoid reporting to the IRS and paying federal income tax on the sale of property by:

          • (1) transferring it to a CRAT;

          • (2) unlawfully inflating (stepping-up) the cost basis in the property on tax documents;

          • (3) selling the property and using the sale proceeds to purchase an annuity; and

          • (4) receiving payments from the annuity, but failing to report the annuity payments as income on tax forms. According to the amended complaint, Schreiner also prepared tax forms to implement the CRAT scheme.

      • Charitable remainder trusts are irrevocable trusts that let you donate assets to charity and draw annual income for life or a specific period. When all applicable laws, regulations and rules are followed, charitable remainder trusts can offer many benefits, but they must not be misused to evade taxes or illegally benefit their beneficiaries.

      • The Justice Department is committed to supporting the IRS as appropriate in its efforts examine charitable remainder trusts to ensure they correctly report trust income and distributions to beneficiaries, file all required tax documents and follow all applicable tax laws and rules.

      • In addition to being enjoined from promoting their CRAT scheme, Schreiner and Columbia CPA Group agreed to be barred from organizing, promoting, marking or selling other tax schemes including conservation easements and monetized installment sales.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure Contact our firm today for assistance.