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The IRS recently announced the implementation of significant enforcement action with respect to syndicated conservation easement transactions, calling them “a priority compliance area.”
The agency said in a news release that “coordinated examinations” are now underway. What this means is that the IRS has different divisions working on the different aspects of transactions of this genre that they have already identified: The Small Business and Self-Employed Division is examining taxpayers that have taken deductions emanating from these transactions, the Large Business and International Division is examining partnerships that have syndicated the transactions and allegedly marketed them, and the Tax Exempt and Government Entities Division is examining the nonprofits involved in accepting the easement donations. Moreover, the IRS said that its Criminal Investigation division is separately examining these transactions, from a criminal angle.
What is the scale of this IRS activity? The IRS said that the examinations “cover billions of dollars of potentially inflated deductions as well as hundreds of partnerships and thousands of investors.” They further stated that they are “litigating cases where necessary, with more than 80 currently docketed cases in the Tax Court.”
IRS Commissioner Chuck Rettig says in the release, “We will not stop in our pursuit of everyone involved in the creation, marketing, promotion and wrongful acquisition of artificial, highly inflated deductions based on these aggressive transactions. Every available enforcement option will be considered, including civil penalties and, where appropriate, criminal investigations that could lead to a criminal prosecution.”
He further pointed out that they are using “innovation labs” that have developed “new, more extensive enforcement tools that employ advanced techniques.”
Syndicated conservation easements are specifically enumerated as an “abusive tax shelter,” i.e., a tax scam that the IRS cautions taxpayers to avoid.
In the IRS’ view, the syndicated easements result in what is considered a “gross overstatement” of the value of the easement, which, after it is donated to a charity, results in a gross overdeduction for the partners of the partnership syndicating the easement donation. Moreover, the IRS has found that these donations often fail to comply with contemporaneous receipt rules that are required for them to qualify as deductible charitable contributions. Importantly, the IRS said in its release that it “has prevailed in many cases involving these basic requirements and has now established a body of law that the IRS believes supports disallowance of the deduction in a significant number of pending conservation easement cases.” They said that they will soon be asking 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.”
For more information, see Notice 2017-10 [lnks.gd], which describes syndicated conservation easement transactions in more detail.
What does CohnReznick think?
Rettig suggested in the release that tax filers who have been involved in a syndicated conservation easement transaction should consult with a “competent” tax advisor to consider available options. Indeed, he noted, it is advantageous to proactively take steps to comply with the tax rules prior to being contacted by the IRS. He warned, “Our continued use of ever-changing technologies would suggest that waiting is not a viable option for most taxpayers.” Typically, amending a return prior to being contacted by the IRS, so that the charitable contribution is not deducted, can serve to avoid most if not all potential penalties. If a taxpayer has already been contacted by the IRS about involvement in a syndicated conservation easement, involving a competent tax advisor to interact with the IRS on the taxpayer’s behalf is considered very advisable. We have the competence to assist here.
Brian Newman
CPA, Partner, Practice Leader, Federal Tax Services
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