IRS Launches Limited Easement Settlement: 10% Penalty Offer for Partnerships
The IRS is offering partnerships a 90-day window to settle conservation easement disputes at a 10% penalty rate.
Why it matters: Legal and tax counsel for partnerships can now advise clients on a time-limited offer that cuts penalty risk and provides cost certainty. The program may help hundreds of clients avoid lengthy litigation and higher penalties if they act quickly.
- IRS settlement lowers the penalty to 10% from the usual 40% for eligible partnerships.
- Around 1,100 cases are pending; each partnership will receive a letter with specific terms.
- Alternative deductions are allowed for actual out-of-pocket expenses, even with disallowed main deductions.
- Tax Court rulings have typically allowed only 6% of claimed deductions in similar cases.
The IRS has introduced a 90-day settlement program for partnerships currently facing disputes over conservation or historic preservation easement deductions. Under this offer, the penalty for overstating the value of property—the "gross valuation misstatement penalty"—will be 10% of the claimed deduction. This penalty is far lower than the standard 40% often imposed by courts.
- Partnerships must wait to receive a direct notification from the IRS; once received, their individual 90-day clock to respond begins.
- Those who decline during the 90-day window have a short 45-day follow-up window, but the penalty then increases to 20%.
- The IRS requires that these settlements fully disallow the challenged deduction, but partners can still claim an "other deduction" for money actually spent—defined as partners' actual out-of-pocket costs for resources relating to the easement. This provides some financial relief even if the main deduction is denied.
- Importantly, eligible partnerships—estimated at about 450—will not owe immediate payment. The IRS will calculate what, if anything, is due after the settlement terms are finalized.
Recent Tax Court decisions underscore the IRS's position: on average, only 6% of contested deductions are allowed and the full 40% penalty is applied.
Previous settlement initiatives suggest modest uptake. Of 405 similar partnership cases, about 32% accepted an IRS offer.
Tax law experts, such as those cited in Tax Notes, stress the importance of assessing client risk tolerance and the financial details of settlement terms before deciding. Attorneys should review IRS communications closely, as eligibility and appeal rights vary by case.
IRS Commissioner said this offer gives partnerships "a chance to resolve these cases on terms more favorable than the results taxpayers have generally achieved in court." Acting Chief Counsel highlighted the "substantial litigation risks" of continuing to fight these cases in Tax Court.
By the numbers:
- 1,100 — Approximate number of active IRS conservation easement cases targeted by the offer
- 10% — Reduced penalty rate under the settlement, compared to a standard 40% penalty
- 6% — Average portion of claimed deductions allowed by courts in recent similar cases
Yes, but: Not all partnerships will be eligible, and details on appeal rights and application of alternative deductions remain case-specific.
What's next: Partnerships should expect IRS communication letters detailing settlement terms; firms should prepare to analyze and advise promptly.