Feds Sue To Shut Down Tax ‘Elimination’ Scheme Using Charitable Annuity Trusts

The government allegations detail the defendants' involvement with at least 70 CRATs, in a scheme that has resulted in an estimated $40 million of taxable income going unreported and at least $8 million in tax revenue losses.

According to the complaint filed in the U.S. District Court for the Western District of Missouri, defendants falsely claim that customers following their CRAT scheme can sell property in a way that eliminates the federal tax on the income generated.

Specifically, the government alleges that each defendant participates in one or more of the following steps involved in the scheme: (1) convincing customers to contribute property to a CRAT (usually real property that has gained value over time); (2) unlawfully inflating (stepping-up) the cost basis in the property; (3) selling the property to purchase an annuity; and (4) falsely reporting the annuity payments received by the customers as tax-free distributions of income made by the CRAT.

The complaint further alleges that the defendants know or have reason to know that their statements to customers about the supposed tax benefits of the transaction they promote are false or fraudulent.

Deputy Assistant Attorney General David A. Hubbert of the Justice Department's Tax Division made the announcement.

The IRS warns taxpayers to be wary of scams (https://www.irs.gov/newsroom/irs-wraps-up-its-2021-dirty-dozen-scams-list-with-warning-about-promoted-abusive-arrangements) that involve claiming inflated charitable contribution deductions and recommends anyone who may have improperly claimed such deductions to consult a tax professional. Guidelines for valuing and deducting property donations to charity can be found in Publication 526 and Publication 561, available on IRS.gov (https://www.irs.gov/).

In the past decade, the Tax Division has obtained injunctions against hundreds of tax return preparer and tax fraud promoters. Information about these cases is available on the Justice Department's website (http://www.doj.gov/tax/tax-division-press-releases). An alphabetical listing of persons enjoined from preparing returns and promoting tax schemes can be found on this page (http://www.doj.gov/tax/program-shut-down-schemes-and-scams). If you believe that one of the enjoined persons or businesses may be violating an injunction, please contact ([email protected]) the Tax Division with details.