Abuses related to syndicated conservation easement deals have prompted Congress, the IRS and courts to increase enforcement, implement legislative changes and pursue extensive litigation.
The government has fared well in recent cases. On average, the Tax Court has allowed only a small fraction of the original deductions claimed—approximately 6%—and has frequently sustained a 40% gross valuation misstatement penalty, along with statutory interest. Against this backdrop, the IRS has periodically offered settlement initiatives intended to resolve disputes more efficiently and on terms more favorable than likely court outcomes.
Since 2020, those initiatives have resolved 405 cases, with roughly one‑third of offers accepted, even though taxpayers were generally required to forgo the charitable contribution deduction, accept penalties and make upfront payments. The IRS has acknowledged that these requirements deterred broader participation.
Overview of the new settlement initiative
The newly announced initiative is intended to build on the prior settlement offers while addressing the barriers that limited acceptance. According to the IRS, there are currently more than 1,100 conservation easement cases pending, including approximately 740 docketed in Tax Court and another 400 under examination. Under the new initiative, nearly 450 cases will no longer require an upfront payment at the time of settlement, with liabilities instead subject to post‑settlement collection procedures.
In addition, the IRS will extend renewed settlement opportunities to approximately 500 cases in which prior offers expired or were rejected, as well as to up to 175 cases that did not previously have the opportunity to participate in an IRS settlement initiative. Eligibility will be determined by the IRS based on the procedural status of each case and other case‑specific administrative considerations.
Settlement terms and timelines
Eligible partnerships will receive individualized settlement letters from the IRS on a rolling basis. Each letter will outline the specific settlement terms available and clearly state the applicable deadlines, which will be strictly enforced.
For the first 90 days following issuance of the settlement letter, the partnership may settle under terms that disallow any charitable contribution deduction but permit an ‘other deduction’ intended to approximate the partnership’s out‑of‑pocket costs. If the offer is accepted during this initial period, no upfront payment is required, and the gross valuation misstatement penalty is reduced to 10%. Interest continues to accrue as required by law. Non‑docketed cases governed by the Bipartisan Budget Act of 2015 will typically be resolved through a closing agreement or similar document, while docketed Tax Court cases will be resolved by stipulated decision.
If the partnership does not accept the settlement within the initial 90‑day window, a second settlement opportunity remains open for an additional 45 days. The substantive terms remain largely the same, but the gross valuation misstatement penalty increases to 20%. No extensions are available for either period.
After the expiration of the combined 135‑day period, cases may be resolved before a court decision only based on hazards of litigation.
Taxpayers involved in conservation or historic preservation easement disputes with the IRS should consult their tax advisors promptly upon receipt of an IRS settlement letter. RSM US can assist partnerships that receive a settlement offer.
