IRS Evaluates Key Factors in Syndicated Conservation Easements

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Key Takeaways

• Not all that glitters: What the IRS really looks for in a syndicated conservation easement.
• Appraisals must be performed by industry professionals following industry standards and submitting comprehensive, impartial analyses that are appropriately reflective of the value and highest and best use of the property.
• Syndication red flags include promotional activity, multiple investors, and complicated transaction structures that may skirt IRS rules, attracting higher review.
• In the eyes of the IRS, agents, promoters and appraisers are just as important as the transaction itself, and any inconsistencies or conflicts can start to jeopardize the whole deal.
• Recent IRS enforcement actions demonstrate the serious penalties associated with abusive or fraudulent conservation easement schemes, highlighting the importance of stringent adherence to the law and transparency.
• Being aware of possible rule changes and best practices can assist people and organizations in managing risk and making informed conservation easement deal decisions.

Here’s what the IRS really looks for in a syndicated conservation easement. Frequent targets are whether appraisals are accurate, deductions occur at the right time, and if participants comply with tax laws.

Land, partners and claimed tax benefits all facts. For anyone evaluating these deals or filing return, awareness of what the IRS looks at helps reduce risk and identify problems early.

IRS Evaluation Criteria

The IRS evaluates syndicated conservation easements using an organized framework. The IRS utilizes a rather definite set of criteria in determining whether or not the contribution is eligible for tax advantages. Below are the main areas of focus when the IRS examines these arrangements:

1. Conservation Purpose: The IRS looks for clear conservation goals that fit legal definitions.
2. Perpetual Restriction: The easement must have lasting limits on use or development.
3. Qualified Organization: Only certain organizations can hold a conservation easement.
4. Baseline Documentation: Proper records are needed to show the property’s state at donation.
5. Public Benefit: The IRS needs proof that the public or environment gains from the easement.

1. Conservation Purpose

IRS requires the stated goals in the easement agreement to coincide with the statutory definition of conservation purpose under I.R.C. § 170(h). It means the easement has to address legitimate goals such as preserving wildlife habitat or open space, not just preventing future construction.

For instance, an easement that asserts it preserves farmland but permits commercial buildings would not satisfy this test. The IRS makes sure the conservation objectives are concrete and achievable. Buzzwords about “green benefits” without specifics won’t cut it.

The agency might benchmark the easement’s purpose to broader conservation initiatives or regional plans. If the easement aligns with broader initiatives, such as regional water conservation, that can aid its cause.

2. Perpetual Restriction

The IRS looks for specific, enforceable rules in the easement that last in perpetuity. Your document ought to state in plain language what owners can and can’t do. IRS evaluates whether such limits in fact prevent growth and other uses that would damage conservation values.

Mortgage subordination agreement is the key. Any mortgage has to accept that the easement is primary, so that its provisions remain in effect if there’s a foreclosure. The IRS looks to see if the donor retained any rights that conflict with the conservation purposes, such as the right to construct new roads.

Any opportunity to alter the easement later is scrutinized.

3. Qualified Organization

The IRS stresses that the holder is a nonprofit or government agency that qualifies. The company’s easement track record matters. The IRS wants to know if it has the personnel and funds to conduct periodic inspections and defend the easement in court, if necessary.

If the organization can’t demonstrate it can maintain the easement, the deduction might be refused. The IRS looks at whether the organization has a schedule and intention to apply the rules going forward.

4. Baseline Documentation

The IRS requires a complete document of the property at the moment it was donated. Among other things, that’s maps, photos, and a report. The baseline findings should be specific enough to provide a foundation for later tracking.

If the property changes, the IRS verifies the records again. Good baseline data assists in demonstrating whether the conservation values are maintained. Review is ongoing.

5. Public Benefit

The IRS reviews whether the easement provides genuine public benefit, such as improved water quality or preserved open space. It looks to see if there is public access for the public to use or enjoy the land such as trails or if the easement meets broader community needs.

Academic or scientific usage can tally. Details in the contract regarding public access or conservation work serve to demonstrate this advantage.

Valuation Scrutiny

Syndicated conservation easements have received worldwide attention as the IRS designates numerous of them as “abusive” tax schemes, with sweeping audits and enforcement. Investors are at real risk of disallowed deductions, penalties, and interest years after filing. The IRS focuses on valuation, making this the point of both scrutiny and compliance.

Appraisal Quality

Valuation is a key issue for the IRS. To be believable, the appraiser actually needs to have done this with other like properties and be certified. The agency has gone after appraisers with sketchy track records—one appraiser, Claud Clark III, showed up in 51 of 58 deals under review, subsequently surrendering all licenses after allegations of inflated valuations.

Appraisals are required to be professional in nature, following accepted methods. The report should provide specific information, analysis and a rational for the underlying valuation.

The table below highlights key criteria the IRS checks:

The IRS looks for conflicts of interest as well. Appraisals influenced by external pressure or relying on partial records sometimes prompt further inquiry.

“Highest and Best Use”

The “highest and best use” analysis is crucial. The IRS examines whether the appraisal correctly takes into account what the property could be used for—absent the easement—based on actual, not hypothetical, uses.

Others that have grossly inflated values by estimating improbable future development — which the IRS red flags. They take a look at sales of similar properties and check to see if the appraisal is in line with the market.

If an appraisal says a remote parcel could build a luxury resort, but nearby land is undeveloped, the IRS will probably question the reasoning. The logic of the use must accommodate realities on the ground and local ordinances.

Timing

Timing is everything. The IRS anticipates the appraisal date will be proximate to the donation date. If the valuation is months old or post-hoc, it’s doubtful.

If the property’s condition shifted—say new zoning or environmental restrictions—between the appraisal and the donation, this gap can impact value. They check for suspicious appraisal activity, similar to how they look for a history of late-filed or last-minute appraisals that might indicate value games.

Inflated Valuations

The IRS goes after puffed values. Overvalued easements can bring disallowed deductions and harsh penalties. Audits snagged nearly all elite-level partnerships of 2016-18 under scrutiny.

Complaints and enforcement actions continue, with new rules shackling reporting requirements.

Syndication Red Flags

Tax collectors are focusing a lot more attention on syndicated conservation easements. With these deals, the IRS has labeled them abusive, and they’re structured in a way that taxpayers and regulators tend to be wary about. Catching the red flags in advance can save you the headache of expensive errors, time-consuming audits, or worst of all, legal consequences.

Some common red flags include:

• Overzealous marketing offers steep donation write-offs—frequently four or five times the amount invested.
• Backdated paperwork, such as checks or tax returns, to make investments appear timely.
• Pre-established or ramped up land prices that don’t fit market reality.
• Too many investors, sometimes without defined roles or even oversight.
• Syndication red flags that seem to be skirting IRS rules.
• Promoters who have a history of deceptive statements or illegal business practices.
• Alerts that large reserves (sometimes $500,000+) need to be allocated to battle audits or lawsuits.
• Record of promoters being criminally charged for fraud, for example or helping file false.

Too much love from easement promoters is an obvious red flag. If a promoter is offering guarantees—like swearing up and down they can give you huge tax write-offs or returns way beyond your investment—it’s wise to slow down and request more information.

Some of these deals are pitched with immediacy, trying to pressure investors to act before a tax deadline. The IRS has discovered that certain promoters even go as far as to backdate paperwork to give the impression that agreements were concluded in time for a deduction. That’s a red flag for abuse.

How about multiple investors in a single easement transaction? When deals include lots of people, it’s more difficult to keep tabs on who owes what. This may cause frictions or uncertainty if the IRS bites for an audit.

Typically, these syndications have predefined valuations for the property, which is another red flag. The IRS has observed that these valuations are often overstated and don’t represent the land’s actual value. If the deduction number appears too high relative to other properties in the area, beware — it’s time to investigate further.

A common takeaway for tax planning when it comes to syndications: be thoughtful about your schedule. The government has charged some promoters with wire fraud and money laundering.

If the paperwork or investment timeline or business relationships seem strained or obscure, that’s a red flag. Taxpayers who buy into these deals risk harsh audits, huge penalties, or lengthy court battles. Others even budget ahead to blow big bucks defending their stance, which speaks to the peril.

The Human Element

It’s about knowing the human element, what the IRS looks for in syndicated conservation easement deals. The agency examines the intentions, the deeds and the trustworthiness of each individual. That means, for example, agents, appraisers, investors and consultants. Their decisions, integrity and expertise can make or break these deals and their legality.

Agent Mindset

Agents influence the way conservation easements are marketed and sold. The IRS is wary of evidence of bias, such as representatives who emphasize exclusively the tax advantages and gloss over the liabilities or legal obligations. How agents discuss easements says much.

Others employ aggressive strategies, such as claiming there’s a pressing deadline or a limited number of spaces, in an attempt to force prospects into snap decisions. These hard-sell moves are warning signs for the IRS.

Agents require a good understanding of IRS regulations. If they skim over the details or appear uncertain about the law, that can result in errors or even legal issues. Occasionally, agents don’t realize how permanent their advice or information can be, particularly if they haven’t followed recent IRS opinions or court decisions.

Transaction Story

There’s a story behind every conservation easement transaction. The IRS verifies that the story is consistent and aligns to the facts. It needs to demonstrate the actual conservation value and not just the bottom line. If the story is too good to be true, or the numbers don’t quite seem right, it makes you question.

It’s not unheard of for Tax Court to determine that the asserted value of an easement is a lot higher than the actual value. Occasionally the narrative is spun or material facts omitted, which can deceive investors. The IRS seeks out these gaps, as they can indicate a transaction that falls short of legitimate easements.

Professional Credibility

A simple checklist for credibility includes: licensure, past work in conservation, peer reviews, complaint history, and ongoing training. For example, the IRS verifies whether appraisers and consultants have a reputable name in the industry. If a professional has been disciplined or complained about, it counts.

As an example, a few promoters were caught and are serving decades behind bars, which demonstrates the true danger. Learning never stops. Pros who refresh themselves on IRS rules are less likely to make expensive errors.

Appraisal or legal mistakes on the part of the humans involved can result in fraudulent deals and actual monetary loss.

Conflicts of Interest

When promoters and appraisers cozy up to one another, there’s danger. The IRS looks for any connections that might influence the value of an easement. Even ordinary connections or recurring business seem fishy. These fights can call the entire arrangement into question.

Without any defined guidelines or straightforward counsel, you can easily make a damaging mistake. When the bonds are too tight, trust shatters quickly. Little errors in judgment can lead to major legal or financial consequences.

Enforcement Actions

Enforcement actions by the IRS against syndicated conservation easements have intensified in recent years. The agency’s focus is identifying and shutting down abusive tax shelters that exploit conservation easement regulations. Since December 2016, the IRS has designated these arrangements as “listed transactions,” implying that they are potentially abusive and warrant specialized reporting. This move assisted the IRS in tracing and auditing a larger number of these transactions.

By November 2019, the IRS took the opposite approach and publicly announced it would be stepping up enforcement. That meant more audits, investigations and enforcement against promotors and investors who participated in schemes that boosted donation values for massive tax write-offs. Some recent enforcement actions provide vivid illustrations of what occurs when taxpayers attempt to perpetrate easement fraud.

In December 2018, the Justice Department brought a civil suit against six individuals associated with these transactions. In March 2019, for example, the U.S. Senate Finance Committee sent letters to 14 participants in abusive transactions, demonstrating that both Congress and the tax agency keep close tabs on these cases. The most eye-popping example came in March 2022, when a federal grand jury charged seven individuals with conspiracy to defraud the United States through fraudulent tax shelters associated with syndicated conservation easements.

As many as nine people have pled guilty in these schemes. Two promoters were sentenced to 25 and 23 years in prison, demonstrating the genuine dangers of getting embroiled in these agreements. The IRS hasn’t just gone after promoters, but investors as well. In October 2020, the agency provided a settlement opportunity for certain syndicated conservation easements already in U.S. Tax court.

It was a great deal. The IRS stated it would settle only with individual partners or groups that own a significant stake in the partnership and that are willing to cooperate with the Chief Counsel’s office. That strategy is meant to promote collaboration and purge the worst violators. Yet IRS audits have grown sharper, homing in on compliance issues like overvalued appraisals and sham partnerships.

Auditors seek out deals with no genuine conservation intent or where the reported value diverges from the land’s true price. These reviews are more than just a paper check. They frequently include deep dives into e-mails, contracts and partnership records.

Future Outlook

Of course, the future of syndicated conservation easements will change as tax agencies and lawmakers crack down. The IRS and Congress already took steps to stop a decades-long pattern of abusive tax shelters associated with these easements. With new rules as of December 29, 2022, the IRS has made clear it is cracking down on setups it deems “one of the worst tax scams.

These transformations aren’t just meant to shut the door on historic abuses but announce a turn toward more rigorous scrutiny for future transactions. Regulations are going to get tougher, aimed at how much tax advantage can attach to any conservation effort. For example, now there is a hard limit: only up to two and a half times the investor’s actual cost may be claimed as a deduction.

This ceiling seeks to maintain valuations and prevent the inflation of land values simply to receive larger tax abatements. Some of those deals used to say significantly higher deductions, resulting in what the IRS estimates is a $36 billion loss in questionable tax deductions since 2010. If anything, less people may attempt to simply utilize these deals for tax shelter purposes.

Individuals that hopped on conservation easement schticks back in the day could now see tangible repercussions. Beginning in July, the IRS is delivering settlement offer letters to taxpayers, providing them a means to resolve disputes but catching up to them for previous conduct. This move indicates that the IRS is not just seeking to prevent new abuses, but is cleaning house on older cases where the regulations may have been pushed.

Public policy shifts might additionally influence how appealing these easements are as a tax instrument. If governments keep piling on the regulation, fewer new deals will be done and it may start to become more about actual conservation and less about tax planning. Others may still find these easements valuable for preserving land and taking some tax relief.

They will have to adhere to tighter standards and more carefully record their activities. Anyway, tax professionals are talking best practices as the landscape shifts. They’re prescribing how to approach new regulations, to be risk-averse and compliant.

These discussions are helping to shape a more cautious and transparent approach to easements, making it harder for shady deals to slip through.

Conclusion

What they really look for are fair land values, rock-solid paperwork and who benefits from each transaction. Significant land value increases or ambiguous reports can put a review on the fast track. The individuals behind each syndicate also count. The IRS wants clear evidence of good faith, athletic honest work, not just a stampede for breaks. Laws keep evolving, so staying current keeps you in the clear. Concrete information, actual figures, genuine actions generate confidence and reduce danger. For anyone in this space, keep records tight and check new IRS rules often. Contact a tax professional if you want to keep your scheme secure and minimal.

Frequently Asked Questions

What does the IRS look for in a syndicated conservation easement?

The irs looks to see that the easement complies with the law, that valuation was proper, and that the arrangement is not primarily tax-motivated.

Why does the IRS focus on valuation in these cases?

The IRS looks for overvalued appraisals – overvalued easements mean improper deductions and potential abuses.

What are common red flags in syndicated conservation easements?

Red flags are big, rapid investor groups, unrealistic appraisals, and huge tax deduction multiples over investment amounts.

How can syndication impact IRS scrutiny?

There are multiple investors and multiple promoters, which means there’s greater potential for doing something non-compliant and therefore the IRS is going to take a closer look.

What enforcement actions does the IRS take?

The IRS can reject deductions, penalize, and sue abusive syndicated conservation easement deals.

How does the IRS evaluate the people involved?

For example, the IRS examines promoters, appraisers, and investors to identify any conflicts of interest or abuse patterns.

What is the future outlook for syndicated conservation easements?

Ongoing enforcement and regulatory updates are ahead as IRS zeroes in on blocking tax abuse in such deals.