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The Internal Revenue Service (IRS) recently announced an increase in investigations of syndicated conservation easement transactions. The agency has stated it will focus on falsely inflated deductions.

What are syndicated conservation easements?

Landowners that wish to conserve their land may consider a conservation easement. A conservation easement is essentially a legal tool that helps ensure the land is not developed while also providing the landowner with tax benefits.

In some cases, the tax benefit may be more than the landowner can use. In these instances, the landowner may consider setting up a business entity to “syndicate” or essentially share the tax deduction. Investors in the business can pay for a membership in exchange for the ability to take the tax deduction.

Why the increased effort for this specific deduction?

There are two concerns. First, that people and businesses are abusing the ability to syndicate the conservation easement. Landowners can legally use a syndicated conservation easement, but it is very complicated. A misstep can result in a tax violation. The IRS is focusing specifically on a review of the allocation of the tax deduction.

Second, the IRS claims landowners are inflating syndicated conservation easement deductions by “billions of dollars.” The agency has accused some taxpayers of inflating the value of the easement by 250% or more.

What happens if the IRS finds issues with the syndicated conservation easement?

Generally, the agency may reallocate the tax deduction, bill those who were taking more than they should and potentially issue penalties. The details of the penalties will depend on the facts of each situation.

What about those who are concerned they made an error?

Taxpayers who are concerned they made in an error in their tax filings regarding syndicated conservation easement transactions have options. In some cases, it may be wise to get into compliance. This can include correcting tax returns. Taxpayers who receive notification of an impending audit regarding this matter are wise to seek legal counsel.