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| 1 minute read

IRS warns "significant increase" in audits coming for Conservation Easements

Conservation easements are an excellent method for maintaining ownership of one’s land while not only prohibiting development but also receiving tax benefits. A conservation easement is a legally-binding agreement between a property owner and a nonprofit organization or a government agency that restricts development on the land covered by the easement. 

Contributions of a qualified real property interest to an organization for conservation purposes can result in a charitable deduction from income tax (Internal Revenue Code (IRC) § 170(h)(1)). Conservation purposes under IRC § 170(h)(4)(A) are (1) preserving land for outdoor recreational use by, or education of, the general public; (2) protecting relatively natural habitats of fish, wildlife or plants; (3) preserving open space (including farmland or forest space) for scenic enjoyment of the general public or under a governmental conservation policy yielding significant public benefit; and (4) preserving a historically important land area or a certified historic structure.

It is important to have a conservation easement properly documented, recorded, donated, and appraised. Otherwise there can be fairly significant penalties as IRC § 6662 imposes accuracy-related penalties on underpayments. The maximum accuracy- related penalty imposed on any portion of an underpayment is 20% (40% in the case of a  gross valuation misstatement), even if that portion of the underpayment is attributable to more than one type of misconduct.

The IRS announced a “significant increase” in audits and potential criminal prosecutions for taxpayers and their advisers involved in land donation deals known as syndicated conservation easements, where multiple people can claim tax deductions for donations of land that is protected from future development. The IRS is concerned about cases where the tax breaks exceed that value of the initial contribution.