The Tax Times: IRS Offers Reduced Penalties in New Conservation Easement Settlement Program

In IR-2026-65 the IRS has released a new, time-limited settlement initiative for taxpayers involved in conservation easement and historic preservation easement disputes, signaling both continued enforcement pressure and a renewed effort to resolve a large inventory of pending cases.

A Shift in Settlement Strategy

Since 2020, the IRS has offered settlement programs in syndicated conservation easement cases, generally requiring taxpayers to concede the charitable deduction entirely, accept penalties, and retain only a limited deduction for out-of-pocket costs. While those initiatives resolved over 400 cases, acceptance rates remained relatively modest.

This new initiative attempts to remove key barriers to participation—most notably by eliminating the requirement for an upfront payment in many cases and reopening settlement opportunities for taxpayers who previously declined or were ineligible.

Key Terms of the New Initiative

Eligible partnerships will receive individualized settlement offers, with a structured timeline and tiered penalty framework:

· No charitable contribution deduction will be allowed.

· Taxpayers may claim an “other deduction,” typically equal to estimated out-of-pocket costs.

· A reduced gross valuation misstatement penalty applies:

o 10% if accepted within the initial 90-day window

o 20% if accepted within the following 45 days

· Interest will continue to accrue under normal rules.

· No upfront payment is required at the time of election (a notable departure from prior initiatives).

· Cases will be resolved through stipulated decisions (for docketed cases) or closing agreements (for non-docketed cases).

After 135 days, the IRS will only consider settlements based on hazards of litigation—typically reflecting just 5% to 7% of the claimed deduction and a 40% penalty.

Scope and Eligibility

The initiative potentially affects a significant portion of the IRS’s current inventory:

· Approximately 1,100 total cases remain pending.

· Nearly 450 cases will benefit from deferred payment terms.

· Around 500 previously rejected or expired offers may be revived.

· Up to 175 new cases may now be eligible.

However, several categories are excluded, including cases on appeal, cases already tried, and certain imminent or designated test cases.

Litigation Reality Continues to Favor the Government

The IRS emphasized that recent court outcomes have overwhelmingly favored the government. On average, the Tax Court has allowed only about 6% of claimed deductions in these cases, typically coupled with a 40% gross valuation misstatement penalty and interest.

This context is central to evaluating the new offer: even with the disallowance of the deduction, the reduced penalty structure and deferred payment terms may produce a materially better economic outcome than continued litigation.

TEFRA vs. BBA Considerations

The mechanics of liability will differ depending on the applicable partnership regime:

· TEFRA cases (generally pre-2018): Investors will receive computational adjustments after settlement.

· BBA cases (2018 and later): Liability generally remains at the partnership level unless a push-out election applies, in which case partners will bear the adjustments individually.

Practical Takeaways

This initiative reinforces the IRS’s dual-track approach: aggressive litigation paired with structured settlement opportunities. For taxpayers and advisors, the decision is less about whether to concede and more about when—and on what terms.

The reduced penalty tiers, elimination of upfront payment in many cases, and the IRS’s strong litigation record all point to a narrow window for achieving a more favorable resolution.

Taxpayers with pending cases should expect individualized correspondence and should be prepared to act quickly, as no extensions will be granted.

How Our Firm Can Help

Once the IRS releases the detailed terms of the new settlement initiative, affected taxpayers will need to make fast, high‑stakes decisions. We expect the program to involve trade‑offs between certainty, cost, and the likelihood of success in continued litigation.

Our firm can assist by:

· Reviewing your existing conservation easement transactions and identifying which are likely to be targeted.

· Evaluating the strengths and weaknesses of your position in light of recent court decisions and IRS guidance.

· Modeling the financial impact of potential settlement versus continued dispute.

· Guiding you through the procedural steps of responding to settlement offers, negotiating where appropriate, and coordinating with other partners and advisers.

If you are involved in a conservation easement transaction or have received IRS correspondence regarding such an investment, now is the time to get ahead of the forthcoming settlement opportunity—not after the clock starts running.

Have A Conservation Easement Problem?