These Conservation Easement Tax Bill Remedies Need Skepticism (1)

Since the IRS started increasing enforcement for syndicated conservation easement transactions six years ago, it has audited nearly all such transactions. Targeted taxpayers have taken one of the IRS’s global settlement deals or gone to trial, often facing near-full disallowance and a 40% penalty.

Investors ultimately bear the burden, and many now face significant tax liabilities. They may wonder what recourse exists beyond paying in full.
Penalties are defended at the partnership level as part of partnership litigation, and reasonable cause generally isn’t an available defense for penalties in syndicated conservation easement cases. These factors make convincing the IRS to abate these penalties extraordinarily difficult.

Recently, some investors and promoters have begun exploring more creative remedies. While the remedies are still limited—such as an offer in compromise, installment payment plans, and bankruptcy—investors should be wary of solutions that sound too good to be true.

We’ve seen several companies promoting interest abatement and an offer in compromise based on effective tax administration, or OIC ETA, as viable paths for investors to receive interest and penalty abatement. But these proposed remedies bring significant hurdles in using them.

Interest Abatement

Promoters of interest abatement argue that the IRS unreasonably delayed the syndicated conservation easement audits and US Tax Court cases against the partnerships, including taking too long to calculate the investors’ tax bill after the cases were resolved.

Interest abatement is governed primarily by Section 6404(e) of the federal tax code, which permits interest abatement when an IRS officer or employee causes an unreasonable delay in performing a ministerial or managerial act. Full or partial interest abatements are among the most challenging remedies to obtain with the IRS.

First, the code states that the secretary “may abate,” meaning the IRS has discretion but isn’t required to abate.

Second, Treasury Reg. 301.6404-2 states that interest can be abated only after the IRS contacts the taxpayer in writing, and only if no significant aspect of the delay can be attributed to the taxpayer. Most delays in syndicated conservation easement audits occur after the partnership files a petition in Tax Court to defend these deductions.

Lastly, discretionary interest abatements apply only to ministerial or managerial acts. The regulation defines a ministerial act as purely mechanical, such as transferring a case file after all decisions are made. A managerial act involves administrative decisions about personnel or resource management. Any decision involving judgment is excluded.

For example, legal analyses, valuation disputes, and decisions on how to process tax shelter cases aren’t ministerial or managerial acts. The IRS is clear that delays caused by coordinated tax shelter examinations are considered general administrative decisions and aren’t grounds for abatement.

Further, the IRS likely will assert during the audit that investors could have made a refundable deposit to the IRS to reduce or eliminate accruing interest, and consider that as a basis for denying an interest abatement claim, notwithstanding the above.

Asking the IRS to exercise discretion to abate interest in transactions that it considers abusive is a tall order, and we expect very few, if any, investors to succeed.

OIC ETA

The OIC ETA is another proposed resolution that is equally challenging. This strategy proposes that the IRS abate interest and penalties under similar arguments used in formal interest abatement requests, such as unreasonable delays or fairness concerns.

Under Treasury Reg. 301.7122-1(b)(3), an OIC ETA is available only if the taxpayer can prove that paying the liability would cause economic hardship or that compelling public policy or equity considerations justify compromise.

As with interest abatements, the IRS has discretion, not an obligation, to grant this relief. The Internal Revenue Manual in Section 5.8.11.3.2 says the IRS won’t consider an OIC ETA for transactions it deems abusive. The reasoning is that compromising abusive or listed transactions would undermine compliance and encourage taxpayers to enter into these or similar transactions without consequence.

Interest abatements and OIC ETA are effectively “Hail Mary” attempts that rely heavily on the IRS exercising discretion in transactions it has been targeting since 2019. Neither of these strategies offer quick resolution: It can take a year or longer to receive an answer from the IRS. Interest and penalties would continue to accrue, resulting in a higher liability if the request is ultimately denied.

Alternative Relief Options

There may be relief options available to investors, but there is no one-size-fits-all solution.

For example, the IRS may miscalculate the taxes owed when charging the investors. When this happens, investors can dispute the IRS’s underlying calculations. When there is no genuine dispute over the IRS’s calculations, investors may be entitled to relief from IRS collections—some investors may be eligible for an installment agreement to pay the balances over time.

There may be an argument for interest abatement under Section 7508A based on the US Tax Court’s 2024 holding in Abdo v. Commissioner and the Federal Court of Claims’ holding last month in Kwong v. Commissioner. However, this is still emerging case law.

Additionally, an “offer in compromise based on doubt as to collectibility” may be available if investors can demonstrate that they are unable to pay the full amount owed within the IRS’s 10-year deadline to collect, or collections statute expiration date. If investors don’t qualify for that offer, they may be eligible for “currently not collectible” status if they can demonstrate an inability to pay anything.

Lastly, some investors may be eligible for a full or partial discharge of the taxes through a bankruptcy filing. Each of these relief options is based on the taxpayer’s individual life and financial circumstances.

Each situation is highly individualized, and options should be evaluated by a licensed tax professional.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jason Wiggam is a founding partner of Wiggam Law in Atlanta focused on matters concerning the IRS, the Georgia Department of Revenue, and other state tax departments.

Judson Mallory is a partner at Wiggam Law in Atlanta representing individuals and businesses in a wide array of IRS and state tax matters.

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