On November 12, 2019, the Internal Revenue Service issued a news release announcing a significant increase in enforcement actions for syndicated conservation easements, designating those transactions as a priority compliance area for the agency.
What are syndicated conservation easements?
In the simplest terms, a syndicated conservation easement transaction occurs when a group of investors purchases a conservation easement on a piece of land in order to benefit from the tax deduction. The problem with such transaction are numerous, but in general, these transactions are known for using inflated appraisals of the easement’s value and not properly allocating tax benefits among the partners/investors. Syndicated conservation easements are included on the IRS’s 2019 “Dirty Dozen” list of tax scams to avoid.
How is the IRS making syndicated conservation easements a priority?
The IRS news release states coordinated examinations are being conducted in the Small Business and Self-Employed Division, Large Business and International Division, and Tax Exempt and Government Entities Division. Further, investigations have been initiated by the IRS’s Criminal Investigation Division. The IRS is also litigating cases where necessary, with more than 80 currently docketed cases in the Tax Court. The news release also notes the IRS continues to work with the Department of Justice Tax Division in this area as well.
In December 2016, the IRS issued Notice 2017-10 (PDF), designating certain syndicated conservation easements as listed transactions. Listed transactions are subject to special tax return reporting requirements. Specifically, that notice listed transactions where investors in pass-through entities (partnerships, LLCs, and S corporations) receive promotional material offering the possibility of a charitable contribution deduction worth at least two and half times their investment.
The IRS’s compliance efforts are focused on the abusive syndicated conservation easement transactions described in Notice 2017-10. The IRS news release adds that the IRS recognizes that there are many legitimate conservation easement transactions.
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.
Will these transactions lead to tax penalties?
The IRS news releases note that: “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.”
If you have any questions or concerns about conservation easement transactions, please contact one of our tax or real estate attorneys to discuss your situation.