November 29, 2022
The IRS is aggressively scrutinizing syndicated conservation easements
On behalf of Lawrence Brown
If it sounds too good to be true, it might not be.
Federal law allows taxpayers to take tax deductions for charitable donations of real estate easement rights to nonprofit entities that must then conserve the properties for the future. Congress recognizes these transactions as charitable because the preservation of certain real estate is for the public’s enjoyment and the property is part of our collective heritage.
Unfortunately, some have wrongfully taken advantage of this opportunity by engaging in “abusive syndicated conservation easement transactions,” said the IRS Commissioner in a November 2019 IRS news release. For example, promoters target taxpayers with aggressive marketing that urges investment in pass-through entities – like partnerships or S corporations in which the entities themselves do not pay income taxes, but rather the profits that flow through the entity to the individual owners are taxed as income on their individual returns.
Inflated property valuation
In these syndicated conservation easement arrangements, promoters tell potential investors that by purchasing an ownership interest in a pass-through entity, they can take charitable donations much larger (potentially two and one-half times larger or more) than their investment amounts when the entity donates property in a conservation easement transaction. Because taking an inflated deduction can deprive the IRS of significant tax revenue, in the November 2019 news release, the agency announced a major focus on civil audits and criminal investigations into these improper transactions. The IRS is not hesitating to take such cases to federal court to request the court to invalidate the deductions.
Many people take legal, accurate charitable deductions for donations of conservation easements. Unfortunately, innocent taxpayers may fall for the abusive arrangements and may not understand the ramifications of the inflated deductions. The IRS has named abusive syndicated conservation easement transactions as “listed transactions” that it may target for illegal tax avoidance.
Smart legal counsel is imperative
Anyone who believes they may face an audit or even a criminal investigation because of having taken a questionable deduction for a syndicated conservation easement should seek immediate legal advice from an experienced tax attorney. The civil or criminal penalties may be significant should the IRS assert an improper deduction amount, so vigorous legal advocacy is important.
Should the matter have advanced farther than the audit or criminal investigation stage, the taxpayer should seek legal advice immediately.
Finally, anyone who is concerned about a conservation easement deduction they took should talk to legal counsel about what can be done to reduce exposure – if a problem is detected – such as filing an amended return or taking other steps.
In addition to taxpayers, the IRS is also focusing on promoters as well as on appraisers giving inflated values and on tax preparers. These related parties should also seek immediate legal representation to minimize negative consequences.