IRS Offers Conservation Easement Deal to Bring Down Big Backlog (1)

The IRS is offering a new settlement to taxpayers who took illegitimate conservation easement deductions, a type of tax scheme the agency has battled for more than a decade.

Partnerships will receive a letter from the IRS notifying them of their eligibility, according to the Wednesday announcement. The offer is valid for 90 days, disallows all charitable contribution deductions, and applies a 10% penalty and interest.

The settlement offer is the latest attempt to combat syndicated conservation easements transactions, where a group of investors inflate the value of donated land and take an outsized tax break. The transactions have resulted in tens of billions of dollars in unwarranted tax breaks.

The cases continue to clog Tax Court, with hundreds on the docket and hundreds more headed to court. Congress passed a law in 2022 to cap conservation easement values in response to fraud.

The agency’s previous settlement offers in 2020 and 2024 largely flopped because the IRS offered different deals to similar taxpayers, required strict deadlines, and made it difficult for companies with many investors to pay, tax lawyers said. The IRS said it resolved 405 cases through previous settlement offers, about a third of those offered accepted it.

The new offer intends to build on prior initiatives “while addressing barriers that may have discouraged acceptance,” according to the announcement.

Partnerships in nearly 450 cases won’t have to make an upfront payment of the settlement but instead will face a post-settlement collection under the new offer. Taxpayers who rejected prior offers or missed the deadline—as many as 500 cases—will be able to take a new offer.

And 175 new cases will be eligible, though that doesn’t include those already tried in court, are on appeal, or are designated as test cases.

The settlement offer allows for an “other deduction” in an amount determined by the IRS, which will generally be equal to the partnership’s out-of-pocket costs. Non-docketed cases under the Bipartisan Budget Act audit regime will be resolved by closing agreement. Docketed cases will be resolved by stipulated decision.

Partnerships can settle on the same terms up to 45 days after the deadline but will face a 20% penalty. No other deadline extensions are available.