IRS Backdating Case Nears an End: Agency Settlement Explained

An IRS decision to settle and forgo a $15.2 million penalty in a US Tax Court conservation easement case after the agency admitted it backdated a document is shaking confidence that the same didn’t happen in other tax challenges.

While settlements in the Tax Court are common, it’s unusual for the Internal Revenue Service to concede a penalty entirely.

LakePoint Land II LLC formed a conservation easement in which the partnership donated land development rights to a nonprofit and then allocated the shares of the charitable deduction to investors. The IRS originally rejected LakePoint’s claim of a $38 million deduction and tacked on a $15.2 million penalty, which LakePoint challenged in 2017.

The IRS has made it a priority to crack down on many conservation easement cases, arguing these charitable deductions are based on inflated appraisals of the donated rights. But earlier this year, the agency admitted than an employee backdated the approval signature on a penalty form in the case, and misled the Tax Court about it for months.

In late August, the IRS was ordered to pay attorney fees and other expenses for LakePoint, and in the subsequent days, both parties agreed to a settlement.

While settlement details are still unknown, the IRS said it wouldn’t pursue penalties in this case and has “undertaken an ongoing review of syndicated conservation easement cases to ensure that the evidentiary record about supervisory approval is properly presented and that the agency pursues or continues to pursue penalties only where appropriate,” according to the motion for continuance.

Here’s where the case stands.

1. What does the settlement mean for LakePoint’s Freedom of Information Act lawsuit against the IRS?

LakePoint filed a separate lawsuit at the US District Court for the District of Columbia, alleging the IRS didn’t make a timely decision on the donor’s request for public documents.

The partnership had asked for copies of documents “relating to the IRS’s false submissions to the Tax Court,” under the Freedom of Information Act.

The court ordered the IRS to respond by Sept. 1, but both parties agreed to push back the deadline to Oct. 6.

The FOIA lawsuit will be dismissed as part of the US Tax Court settlement.

2. What happens to three other conservation easement donor cases filed after the LakePoint case?

Several other conservation easement donors have also called on the IRS to admit the agency had backdated approval forms. These cases are ongoing in US Tax Court.

The cases concern a requirement in Section 6751(b) in which the initial determination of penalty must have written approval from an immediate supervisor.

In an exhibit filed in the US Tax Court in August, partnerships Arden Row Assets LLC, Basswood Aggregates LLC, and Delwood Resources LLC show an IRS employee admitting to backdating penalty forms.

A spokesperson for former US Attorney General Rod Rosenstein, now a partner at King & Spalding LLP, said he will file a FOIA suit in the Arden Row, Basswood, and Delwood cases. Rosenstein also represented LakePoint in its FOIA lawsuit that was dropped.

3. How does this look to the average taxpayer?

The optics of the IRS admitting to backdating a form and agreeing to drop penalties in the LakePoint case may further undermine confidence in the agency.

Everyone—from lawmakers to the general public—likes to hate on the IRS, and the recent settlement piles on to the reasons to doubt the agency’s ability to enforce the tax code and collect the correct amount of taxes.

Tax attorneys will likely be on high alert for other agency errors.

4. What does the blowback mean for IRS funding and reputation?

IRS Commissioner Danny Werfel wasn’t leading the agency when the backdating mistakes were made and the swift settlement after the memorandum opinion came out signals that the IRS is ready to move on.

While the agency is no stranger to scrutiny, the backdating case comes at a time when Werfel is trying to regain taxpayer trust and push back against future Congressional budget cuts.

The IRS has pointed to the tens of billions in new funds from the Democrats’ Inflation Reduction Act as the answer to help modernize the IRS after years of under funding. But Werfel has warned that if the agency’s budget is cut in annual appropriations, the IRS will have to dip into its modernization funds.

To starve the agency of more funds and resources could exacerbate issues, like backdating, that already exist. But will lawmakers want to throw more money at what they could say is a broken agency?

Read More:

• IRS Agrees to Settlement in Easement Penalty Backdating Case
• IRS Stokes Coverup Allegations With Admission It Backdated Form
• IRS Backdating Court Order Spotlights Culture, Attorneys Say
• IRS’s Deficiency Notice Practice Draws Tax Court Rebuke
• IRS Sanctioned by Court for ‘Bad Faith’ on Backdated Document
• IRS, Easement Donor Ask for More Time on FOIA Request Allegation