The IRS recently flagged certain trust-based transactions for closer tax reporting attention. Specifically, the Treasury Department and IRS issued final regulations identifying certain arrangements that claim to be Charitable Remainder Annuity Trusts, or CRATs, as listed transactions.
This does not mean every charitable trust is a problem. It also does not mean every taxpayer using trust planning has done something wrong. But it does mean taxpayers should be careful before filing a return that includes a complex trust arrangement, especially if the structure was promoted as a way to reduce or eliminate taxable income or capital gain.
The practical message is simple: if a tax strategy involves a trust, appreciated property, annuity payments, or a promise to sharply reduce taxable income, review it carefully before filing.
What Did the IRS Announce?
On July 8, 2026, the IRS announced final regulations naming certain Charitable Remainder Annuity Trust transactions as listed transactions. The IRS described the issue as involving “certain arrangements purporting to be Charitable Remainder Annuity Trusts (CRATs) as listed transactions.”
The IRS is not saying that all CRATs are abusive. It is focusing on certain arrangements that purport to be CRATs and are being used in a way the IRS views as problematic.
The IRS also stated that “material advisors and certain participants in these listed transactions are required to file disclosures with the IRS and are subject to penalties for failure to disclose.”
The concern is not only whether the taxpayer believes the strategy is valid. Once a transaction is identified as a listed transaction, disclosure obligations can become a separate issue. Missing those requirements may create additional penalty exposure.
What Is a Listed Transaction?
A listed transaction is a transaction that the IRS has specifically identified as a tax-avoidance concern. These transactions receive special reporting attention.
For most taxpayers, the important point is not the technical label. The important point is if a transaction is listed, it may need to be disclosed to the IRS, and failure to disclose can create consequences.
This is why taxpayers should not treat complex tax planning as a simple filing position. If a structure has been flagged by the IRS, the taxpayer should review the transaction before filing, confirm whether disclosure forms are required, and keep records that explain the position taken on the return.
What Type of Trust Arrangement Is the IRS Concerned About?
The IRS release describes a transaction where taxpayers try to eliminate ordinary income and/or capital gain on the sale of property. According to the IRS, the transaction can involve property with a fair market value higher than its basis, such as closely held business interests or business-related assets. The property is transferred to a purported CRAT. The CRAT then sells the property and uses some or all of the proceeds to buy a single premium immediate annuity, also called a SPIA.
The IRS says the taxpayer or beneficiary then claims that the CRAT annuity is taxable only to the extent of the income portion of the SPIA annuity payment by misapplying certain tax rules.
In simpler terms, the IRS is concerned about arrangements where a taxpayer moves appreciated property into a trust structure, sells that property, buys an annuity, and then claims a tax result that significantly reduces the income or gain that would otherwise be reported.
This is why the issue matters for business owners and high-income taxpayers. The IRS specifically refers to property such as interests in a closely held business and assets used or produced in a trade or business.
Who Should Pay Attention Before Filing?
This IRS announcement is especially relevant for taxpayers who have used, or are considering, trust-based tax planning involving appreciated assets.
Taxpayers should review the issue carefully if they:
- transferred appreciated property into a trust;
- transferred closely held business interests into a trust;
- sold assets through a trust structure;
- received or expected annuity payments connected to a trust;
- were told a structure could eliminate or sharply reduce ordinary income or capital gain;
- worked with a promoter or advisor who recommended a CRAT-based strategy;
- received advice that disclosure was unnecessary despite the transaction having aggressive tax benefits.
Not every one of these facts means the taxpayer participated in a listed transaction. But they are enough to justify a careful pre-filing review.
A taxpayer should not wait until an IRS notice arrives to understand how the transaction was reported.
What Should Taxpayers Review Before Filing?
Before filing a return that includes a complex trust transaction, taxpayers should slow down and review the core documents.
- First, review the trust documents. Understand what type of trust was created, when it was created, and what property was transferred into it.
- Second, review the asset transfer. Was appreciated property moved into the trust? Was it a business interest, real estate, or another asset with a value above its tax basis?
- Third, review the sale documents. If the trust sold the asset, confirm how the sale was reported and who reported the income or gain.
- Fourth, review any annuity purchase. If a single premium immediate annuity was purchased, understand how it fits into the transaction and how the payments are being treated for tax purposes.
- Fifth, review the tax return position. Look closely at whether the strategy reduced or eliminated ordinary income or capital gain. If the tax benefit is large, the explanation and documentation should be strong.
- Sixth, review disclosure obligations. If the transaction is listed or substantially similar to a listed transaction, the taxpayer may have reporting requirements.
- Seventh, review advisor communications. Keep copies of memos, emails, planning documents, and engagement letters. If the IRS asks questions later, these materials may help explain what advice was received and what the taxpayer understood at the time.
Why Disclosure Matters
Disclosure is a major part of this issue.
The IRS release makes clear that certain participants and material advisors may be required to file disclosures and may face penalties for failure to disclose. That means the filing risk is not limited to the income tax calculation itself. A taxpayer may also need to consider whether the transaction was properly reported as a listed transaction.
This is where taxpayers can get into trouble. A taxpayer may focus only on whether the return preparer entered the numbers correctly. But for listed transactions, the question may also be whether the transaction was properly disclosed.
If a taxpayer participated in a transaction that is now listed, or substantially similar to one that is listed, the taxpayer should review the filing position before submitting the return.
Common Mistakes to Avoid
- Assuming that a trust structure is safe simply because it has a charitable label. A charitable element does not automatically make every tax result acceptable.
- Relying only on the promoter’s explanation. If a strategy was sold as a way to eliminate tax on appreciated property, that should be reviewed carefully.
- Ignoring the listed transaction label. Once the IRS identifies a transaction for special reporting, disclosure requirements may become important.
- Filing without organizing records. Trust documents, sale records, annuity documents, valuation materials, contribution records, and tax advice should be kept together.
- Waiting for an IRS notice before understanding the transaction. If the taxpayer cannot explain the position before filing, responding later may be much harder.
What If the IRS Sends a Notice?
If the IRS sends a notice related to a trust transaction, the first step is to read the notice carefully. Do not assume it is a routine letter. Do not ignore the deadline. Do not send a rushed response without understanding what the IRS is asking.
The taxpayer should gather the relevant documents, including the trust agreement, asset transfer documents, sale records, annuity documents, tax return schedules, disclosure forms, and advisor communications.
The response should match the issue raised in the notice. If the IRS is asking about disclosure, the response should address disclosure. If the IRS is asking about income or gain, the response should address how the tax treatment was determined. If the IRS is asking for documents, the taxpayer should provide organized records, not a scattered set of unrelated files.
Understand the notice. Organize the records. Respond with a plan.
That approach is especially important when complex tax planning is involved.
The IRS announcement on certain CRAT transactions is a reminder that complex tax strategies should be reviewed carefully before filing. A trust is not automatically a problem. But when a transaction involves appreciated property, a trust structure, an annuity purchase, and a claimed reduction in taxable income or gain, taxpayers should be cautious.
The safest approach is to review the documents, understand the tax position, check disclosure obligations, and keep organized records.
If the IRS questions a trust-related filing position, a calm and structured response matters.
IRS Audit Group can help taxpayers understand the notice, organize the facts, and consider the next step.
IRS AUDIT GROUP
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