Abusive CRATS Now Listed Transactions
Published July 10, 2026
In T.D. 10051, the Internal Revenue Service (IRS) stated that abusive charitable remainder annuity trusts (CRATs) may be listed transactions.
The final regulations attack a claim by taxpayers that a CRAT may be funded with appreciated property and then pay out tax-free income. The final regulations require material advisors and certain participants in the listed transactions to disclose these CRATs to the IRS or face serious penalties.
IRS Chief Executive Officer Frank J. Bisignano stated, "The Internal Revenue Service remains vigilant and is watching out for tax avoidance schemes. Taxpayers should not forget that the IRS will continue to combat abusive tax shelters and transactions."
The Department of the Treasury and the IRS have been discussing abusive CRATs for several years. They have been included in the annual "Dirty Dozen" list for the past two years. In 2024, the IRS issued proposed regulations (REG-108761-22) that attempted to address the abusive CRAT problem. The final regulations modify Reg. 1.6011-4, Reg. 1.6011-15 and Sections 6111 and 6112.
An abusive CRAT is a listed transaction if certain parameters, or substantially similar parameters, are met. In general, there must be an annuity trust under Section 664(d)(1) that is funded with appreciated property whereby the trustee sells the property and purchases an annuity. The income recipient then treats the annuity as though it were a payment under Section 72. The IRS considers this abusive because some advisors and taxpayers are claiming that the basis inside the CRAT is stepped up to fair market value of the annuity and, therefore, making the annuity payment substantially nontaxable.
If the CRAT is deemed abusive, then material advisors are required to disclose the plan to the IRS. There is an exception, however, for charitable remaindermen. If a charitable remainderman is only involved as a potential future recipient of the trust principal, it is exempt from reporting.
Tax attorney Klaus Gottlieb focuses his practice on charitable trusts. Gottlieb stated, "The penalty for staying silent runs up to $100,000 for an individual – there is no good-faith excuse. And the clock for the IRS to come after the transaction never runs out until one year after the taxpayer discloses."
During the required comment period between issuing the proposed and final regulations, there was only one commentator. This individual expressed concern that the charitable remaindermen should not be subject to the penalties or viewed as a party to the transaction. Because the charitable remainderman generally does not aid or assist in the creation of the CRAT, it should be excluded.
Treasury and the IRS determined that it was not necessary to provide a specific exception for the charitable remaindermen. The IRS concluded that the rules are sufficiently clear that charitable remainder recipients will not be considered material advisors for providing educational materials such as gift proposals.
The listed transaction provisions of Section 6707A potentially apply to material advisors. In addition, the limitations period for the IRS is extended under Section 6501(c)(10). A material advisor could face penalties under Section 6700 for promoting an abusive tax shelter.
Finally, the exception to the listed transaction requires an entire remainder interest to be transferred to a qualified exempt charitable entity. If a portion of the remainder may be transferred to a noncharitable entity, it is a listed transaction.
Editor's Note: Most CRATs are funded with appreciated property. After a tax-free sale of the property, the proceeds are invested in securities. The income to the recipients is reported under the four-tier structure of Section 664. These typical CRAT transactions are not covered by the final regulations.
Summer Launch for IRS Security Summit
On July 7, 2026, the Internal Revenue Service (IRS) announced that it was joining with its Security Summit partners to present a five-week series related to identity theft threats. The title of the series is "Protect Your Clients; Protect Yourself."
The Security Summit is in its eleventh year. The campaign is comprised of the IRS, state tax representatives and tax software company representatives who join together each year with a primary goal of preventing tax identity theft.
The 2026 campaign will focus on the new and creative scams that are aimed at tax professionals. There are Nationwide Tax Forums planned this summer in New Orleans, New York City, Orlando and San Diego.
IRS Chief Executive Officer Frank J. Bisignano stated, "Tax professionals play a critical role in the line of defense against tax-related identity theft and attacks on the integrity of the tax system. The 2026 summer series gives tax pros practical steps they can take now to protect client data, strengthen their businesses, and to stay ahead of scam artists and their evolving schemes to defraud taxpayers."
Taylor Rodier, a Security Summit partner and Legislative Affairs Manager at Drake Software, emphasized the importance of protecting taxpayers. Ms. Rodier noted, "Practical security steps, early reporting and continued collaboration are among the best tools we have to fight tax-related identity theft, and we are proud to work with our Security Summit partners to help tax pros stay ahead of an ever-evolving threat landscape."
There are several specific strategies that are used by identity thieves. Tax professionals should continually update their knowledge of security basics and train employees to watch for these red flags:
- IRS Impersonation — The scammer may use email, text, spoofed caller ID or computer-generated calls to victims. The scammers have great expertise in pressuring a victim to click a link, open an attachment containing a malware program or share sensitive financial information.
- Social Media Tax Advice — Many individuals are vulnerable to scammers who use social media to publish false tax information. Inaccurate social media advice may convince taxpayers to claim credits for which they are not qualified for, file for improper refunds and purportedly avoid all taxes, interest and penalties.
- New Client Scheme — The fraudster will pose as a prospective client. After a series of emails to the tax professional, the fraudster has established a working relationship. He or she then sends information that may be needed by the tax professional for tax preparation. However, this email may include a link or attachment that downloads malware to the computer and network of the tax professional. The scammer uses the stolen information to file false returns for the clients of the tax professional and claim large refunds.
- Sophisticated Phishing Emails — Scammers continue to become more proficient at sending “phishing” emails to tax professionals. A common goal is to acquire the tax professional’s Electronic Filing Identification Number (EFIN), Preparer Tax Identification Number (PTIN) or the Centralized Authorized File (CAF) number. The scammer may use these numbers to file fraudulent tax returns.
Tax professionals who believe they may be a victim of a data breach should notify the IRS Stakeholder Liaison assigned to their state. The IRS Liaison will ensure that the appropriate IRS offices are given notice of the breach. With this notice, the IRS can take steps to reduce the risk that there will be fraudulent returns filed in the name of taxpayers who are clients of a tax professional. The tax professional should also report any data breach to the appropriate state tax agency. There is a webpage hosted by the Federation of Tax Administrators to report to the appropriate state individuals.
For each week in the series, the IRS plans to highlight security strategies in this summer campaign. Week two will focus on phishing and spear phishing strategies by scammers. During week three, the IRS will outline the steps for creating a Written Information Security Plan designed to keep taxpayer information safe and secure. Week four will cover specific security tools, including multi-factor authentication, Identity Protection Numbers (PINs), IRS Online Accounts and Tax Pro Accounts. Week five will highlight signs that indicate there has been an identity theft and explain the procedures for reporting the theft.
Editor's Note: The Security Summit outlines strategies used by fraudsters each year. However, those strategies continue to change, and fraud efforts are advancing rapidly through the use of artificial intelligence (AI). With enhanced and improved AI fraud strategies, there are greater risks from fraudsters and scammers for both taxpayers and tax professionals.
IRS Updates QDOT Regulations
In T.D. 10050, the Internal Revenue Service (IRS) published the final regulations applicable to a qualified domestic trust (QDOT). The QDOT is important because Section 2056(d)(1) disallows a marital deduction for property passing to a non-citizen spouse. However, Section 2056(d)(2)(A) permits a marital deduction if the property is transferred through a QDOT.
Section 2056A(a) defines the QDOT. The primary requirements are that there must be a qualified trustee with specific powers and the trust must have provisions that will ensure future collection of estate tax. Under Section 2056A(b), the executor of the decedent must elect under Section 2056A to qualify the transfer under QDOT requirements.
Generally, there are rules for requiring payment of the deferred estate tax if the QDOT principal is distributed during lifetime or on the balance of the trust principal at the demise of the surviving spouse.
The QDOT proposed regulations under Reg. 20.2056A were initially created in 1993. These procedures established requirements for the QDOT and methods for ensuring future payment of estate tax. The final regulations, T.D. 8612, were published in August 1995. There were also temporary regulations published at that time specifying the requirements necessary to ensure the future collection of estate taxes.
The 1996 updates by Treasury in T.D. 8686 did not include updated references to other amended regulations. The proposed regulations in August 2024 (REG-119683-22) update the references to multiple additional regulations. They also update the procedure that enables filing a security instrument to satisfy QDOT requirements.
Commentators noted the updated guidance "would save taxpayers time and money, as well as raise taxpayer confidence in the tax system by supporting equity and taxpayers’ rights." The IRS considered the various comments and adopted two nonsubstantive changes. The office of the "Estate Tax Advisory Group" will now include any successor office. The final regulations will apply on the date they are published in the Federal Register.
Applicable Federal Rate of 5.2% for July: Rev. Rul. 2026-12; 2026-28 IRB 1 (15 June 2026)
The IRS has announced the Applicable Federal Rate (AFR) for July of 2026. The AFR under Sec. 7520 for the month of July is 5.2%. The rates for June of 5.0% or May of 5.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2026, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”
