Under a conservation easement, a property owner voluntarily agrees to relinquish certain development and use rights to a parcel of land or building to protect its conservation value. In addition to helping preserve the property's natural beauty or historical significance, the owner may be eligible for a federal charitable contribution deduction for the fair market value of a donated conservation easement if the arrangement meets certain requirements.
However, the IRS has long targeted what it considers "abusive" conservation easements, and recent actions make clear that they remain on its radar. If you're involved in a conservation easement, or considering one, here's a look at two important recent developments.
In early May 2026, the IRS announced an update to its conservation easement webpage. One point of emphasis is that, in the agency's view, promoter-driven transactions often rely on inflated valuations that can result in disallowed deductions, back taxes, penalties and interest. Such schemes, the IRS says, are designed to sell tax benefits, rather than preserve property.
The expanded webpage explains that legitimate conservation easements are generally based on long-standing ownership of the restricted property, accurate valuations and compliance with rules governing qualified conservation contributions. Conversely, abusive "syndicated conservation easement transactions" are known to feature promoter-driven structuring, artificially high valuations and promised deductions that far exceed the "economics of the [taxpayer's] investment."
The IRS goes on to explain that, in one of these dubious transactions, multiple investors typically form a partnership (or other pass-through entity) that buys or owns property and donates a conservation easement to a qualified organization to claim a significant tax deduction. The expanded webpage notes that syndicated historic preservation easements tend to have the same issues — especially overvaluation of the property. In addition, it points out that historic property may already be subject to local preservation or zoning laws, in which case the partnership is giving up little or nothing of value.
According to the IRS, when challenges to conservation easements reach the U.S. Tax Court, it has consistently disallowed the claimed deductions, in whole or in part, and imposed substantial penalties. On average, the court has allowed only about 6% of the claimed deductions and imposed a 40% gross valuation misstatement penalty. Arrangements deemed abusive can also result in penalties for fraud and even criminal enforcement.
There's some good news for partnerships already involved in IRS disputes over conservation easement deductions. One week after announcing the updates to its webpage, the IRS launched a new settlement initiative for applicable cases. The agency first offered one of these in 2020 and has since rolled out several others.
The initiatives usually provide more favorable outcomes than most partnerships could hope to achieve in the Tax Court. Previous versions required parties to pay penalties for underpayments and limited deductions to only their estimated out-of-pocket costs. Charitable contribution deductions for claimed easement donations were barred.
The latest settlement initiative, which generally applies at the partnership level, is intended to advance the same goals as previous editions. But it also addresses some hurdles that may have discouraged eligible partnerships from settling conservation easement disputes with the IRS in the past.
Under the new version, some parties won't be required to make an upfront payment of the settlement amount. Others who rejected their previous settlement offers or saw their cases expire will have another shot at resolution. And some partnerships that never had the opportunity to settle may now do so.
Importantly, the latest initiative comes with strict time limits. A partnership that receives an IRS settlement letter will have 90 days to accept various specified terms. These usually include:
If that period expires without an election into the initiative, a partnership will then have an additional 45 days to settle on similar terms — except the gross valuation misstatement penalty will double to 20%. No extensions are available for either the 90- or 45-day terms.
The IRS will determine eligibility for the initiative based on each case's status and other case-specific considerations. Some may be deemed ineligible. For example, a partnership generally can't participate if its case:
"Test cases," as designated and defined under IRS rules, are also generally ineligible unless all bound cases have settled or agree to settle under the initiative.
Make no mistake — despite this latest settlement opportunity, the IRS will continue to target conservation easements it views as abusive. Whether you're already a member of a partnership or considering joining one, work closely with your tax and legal advisors to follow the tax rules, as well as the substantiation and documentation requirements.
Get in touch today and find out how we can help you meet your objectives.
