In News Release IR-2019-182 the IRS announced that it was going to increase enforcement actions against syndicated conservation easements.[1]

The IRS had put certain syndicated conservation easements on the listed transaction list in 2016.  As the IRS news release describes the targeted structures:

In December 2016, the IRS issued Notice 2017-10[2], 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 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.

…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 that the IRS believes supports 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.[3]

The IRS in the release encourages taxpayers to avoid penalties and interest by acting now to remove any tax benefits from such transactions from their returns.  But see the discussion later in this article about why this action does not necessarily solve the problem.

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.[4]

The IRS also notes that it’s not just participants who may face actions from the agency, noting:

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 advisors, 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).[5]

Advisers who have clients that have invested in conservation easement programs should review Notice 2017-10 and consider if the program appears to be one covered by the Notice.  The taxpayer is especially at risk if the taxpayer failed to timely file the disclosure forms for affected returns (Form 8886, Reportable Transaction Disclosure Statement).  Note that a failure to file the form both keeps the statute for assessment open and subjects the taxpayer to very substantial penalties.

Even if a return was filed before Notice 2017-10 was issued, if the statute had not yet closed on the assessment of tax for the return by the date the transaction was put on the list, the statute will remain open if the form was not filed shortly after the publication date.[6]

If the adviser was involved with the preparation of that return, the adviser likely should suggest the taxpayer seek alternative counsel on the issue, since there may be conflict of interest issues under Circular 230,[7] the AICPA Code of Professional Conduct and state accountancy board regulations at play if the disclosure was missed and the professional that originally prepared the return attempts to provide representation.  The potential conflict issue is heightened by the IRS’s explicit threat to take action against preparers as part of this initiative.

As well, while the IRS suggests amending the return to solve the penalty problem, such an amended return will not solve the failure to properly disclose listed transaction problems.  The taxpayer could be in a similar situation to that of the taxpayer in Yari v. Commissioner, 143 TC No. 7, aff’d CA9 that we discussed in 2016 on the Current Federal Tax Developments website.[8]

[1] “IRS increases enforcement action on Syndicated Conservation Easements,” IRS News Release IR-2019-182, November 12, 2019, https://www.irs.gov/newsroom/irs-increases-enforcement-action-on-syndicated-conservation-easements, retrieved November 13, 2019

[2] Notice 2017-10, https://www.irs.gov/pub/irs-drop/n-17-10.pdf, retrieved November 13, 2019

[3] IR-2019-182, https://www.irs.gov/newsroom/irs-increases-enforcement-action-on-syndicated-conservation-easements, retrieved November 13, 2019

[4] IR-2019-182, https://www.irs.gov/newsroom/irs-increases-enforcement-action-on-syndicated-conservation-easements, retrieved November 13, 2019

[5] IR-2019-182, https://www.irs.gov/newsroom/irs-increases-enforcement-action-on-syndicated-conservation-easements, retrieved November 13, 2019

[6] IRC §6501(c)(10)

[7] Circular 230, §10.29

[8] Ed Zollars, “Tax Shown on Original Return, Not Amount Computed on Amended Return, Used to Compute Limitation on §6707A Disclosure Penalty,” Current Federal Tax Developments website, October 17, 2016, https://www.currentfederaltaxdevelopments.com/blog/2016/10/17/tax-shown-on-original-return-not-amount-computed-on-amended-return-used-to-compute-limitation-on-6707a-disclosure-penalty, retrieved November 13, 2019