IRS increases enforcement action on Syndicated Conservation Easements

Written on Nov 20, 2019

The IRS is increasing enforcement actions for syndicated conservation easement transactions, a priority compliance area for the agency.

Coordinated examinations are being conducted across the IRS in the Small Business and Self-Employed Division, Large Business and International Division and Tax Exempt and Government Entities Division. Separately, investigations have been initiated by the IRS' Criminal Investigation division. These audits and investigations cover billions of dollars of potentially inflated deductions as well as hundreds of partnerships and thousands of investors.

In December 2016, the IRS issued Notice 2017-10, which designated certain syndicated conservation easements as listed transactions. Specifically, the Notice listed transactions where investors in pass-through entities receive promotional material offering the possibility of a charitable contribution deduction worth at least two and a half times their investment. In many transactions, the deduction taken is significantly higher than 250 percent of the investment. Syndicated conservation easements are included on the IRS's 2019 "Dirty Dozen" list of tax scams to avoid.

Taxpayers may avoid the imposition of penalties relating to improper contribution deductions if they fully remove the improper contribution and related tax benefits from their returns by timely filing a qualified amended return or timely administrative adjustment request.

The IRS's comprehensive compliance efforts are focused on the abusive syndicated conservation easement transactions described in Notice 2017-10, recognizing that there are many legitimate conservation easement transactions.

In addition to grossly overstating the value of the easement that is purportedly donated to charity, these transactions often fail to comply with the basic requirements for claiming a charitable deduction for a donated easement. The IRS has prevailed in many cases involving these basic requirements and has now established a body of law supporting disallowance of the deduction in a significant number of pending conservation easement cases. Where it hasn't done so already, the IRS will soon be moving the Tax Court to invalidate the claimed deductions in all cases where the transactions fail to comply with the basic requirements, leaving only the final penalty amount to be determined.

In addition to auditing participants, the IRS is pursuing investigations of promoters, appraisers, tax return preparers and others. Further, the IRS is evaluating numerous referrals of practitioners to the IRS Office of Professional Responsibility. The IRS will develop and assert all appropriate penalties, including penalties for participants (40 percent accuracy-related penalty), appraisers (penalty for substantial and gross valuation misstatements attributable to incorrect appraisals), promoters, material advisers, and accommodating entities (penalty for promoting abusive tax shelters and penalty for aiding and abetting understatement of tax liability), as well as return preparers (penalty for understatement of taxpayer's liability by a tax return preparer).

In December 2018, the Department of Justice filed a complaint seeking to stop several individuals and an entity from organizing, promoting or selling allegedly abusive syndicated conservation easement transactions. The IRS continues to work with the Department of Justice in this area and reminds taxpayers that continued disclosure of syndicated conservation easement transactions is required under Notice 2017-10.

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