WASHINGTON, D.C. — Thousands of taxpayers involved in disputed conservation and historic preservation tax deductions could receive another opportunity to settle with the Internal Revenue Service under a new limited-time program that lowers penalties and, in many cases, delays upfront payment requirements.
What This Means for You
- Eligible taxpayers in conservation easement tax disputes may receive reduced penalties if they settle within strict deadlines.
- The IRS is reopening settlement opportunities for hundreds of cases previously rejected or excluded.
- Taxpayers who continue litigation could face significantly larger penalties if they lose in court.
The Internal Revenue Service announced the initiative as part of its ongoing enforcement campaign involving conservation easement and historic preservation easement tax disputes.
Conservation easements allow landowners to give up certain development rights on property in exchange for a charitable tax deduction intended to preserve land or historic structures. Over the past decade, federal regulators and courts have increasingly targeted syndicated easement transactions, which critics describe as tax shelters built around inflated property valuations.
IRS officials noted more than 1,100 easement-related cases remain active, including roughly 740 currently docketed in U.S. Tax Court and another 400 under IRS examination.
“Congress created the conservation easement deduction to encourage genuine preservation, not to subsidize tax shelters built on inflated valuations,” IRS Chief Executive Officer Frank J. Bisignano said in a statement.
Reduced Penalties and Delayed Payments
Under the new initiative, eligible partnerships that accept settlement terms within 90 days of receiving an IRS settlement letter would face a 10% gross valuation misstatement penalty instead of the substantially higher penalties commonly imposed through litigation.
A gross valuation misstatement penalty is a federal tax penalty applied when the IRS determines a taxpayer dramatically overstated the value of donated property or assets.
Taxpayers who settle would not be permitted to claim the disputed charitable deduction. Instead, they would generally be allowed to deduct certain out-of-pocket costs associated with the transaction.
Unlike previous settlement programs, many eligible taxpayers would no longer need to make an upfront payment at the time they enter the settlement agreement. The IRS indicated nearly 450 cases could qualify for post-settlement collection arrangements instead.
For taxpayers who miss the initial 90-day window, the IRS is offering an additional 45-day period with a higher 20% penalty rate.
After the combined 135-day period expires, the agency indicated cases would generally proceed toward litigation using standard settlement positions tied to court risk assessments. IRS officials noted recent Tax Court rulings have typically allowed only about 5% to 7% of the originally claimed deduction while imposing 40% penalties plus interest.
Expanded Eligibility
The IRS also reopened settlement access for hundreds of taxpayers whose earlier settlement offers either expired or were rejected.
According to the agency, as many as 500 previously rejected or expired cases may now reenter settlement negotiations, while another 175 cases that were previously excluded from settlement initiatives may become eligible.
Acting IRS Chief Counsel Kenneth J. Kies pointed to the government’s recent courtroom success in easement litigation.
“The courts have repeatedly found abusive activity in this area, regularly sustaining major reductions in claimed deductions and significant penalties and interest,” Kies said.
IRS officials stated the government has consistently prevailed in recent conservation easement litigation, with courts allowing an average of only 6% of originally claimed deductions.
Cases Excluded From the Program
The settlement opportunity will not apply to every easement-related case.
The IRS stated the program excludes cases that have already gone to trial and are awaiting rulings, cases currently on appeal in federal circuit courts, matters already settled, certain test cases, and cases scheduled for trial within 30 days of the announcement.
The agency added eligibility decisions will depend on both case status and administrative considerations.
Additional information about syndicated conservation easement transactions is available through the IRS conservation easement guidance on IRS.gov.
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