IRS: Abuses of Tax Incentives for Constructive Easements Will Not Be Overlooked

Under relevant provisions of the Internal Revenue Code (IRC), U.S. taxpayers who own real estate of historical significance can receive tax breaks for agreeing to preserve their property in its current condition. In the words of the Internal Revenue Service (IRS), “In recognition of our need to preserve our heritage, [the IRC allows] an income tax deduction for owners of significant property who give up certain rights of ownership to preserve their land or buildings for future generations.”

The agreement to preserve property of historical significance typically takes the form of a conservation easement. While the income tax deductions for conservation easements can provide property owners with significant tax savings, property owners must be careful not to overstep when claiming these deductions. As Virginia tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, the IRS has recently raised concerns about tax evasion through the improper use of conservation easement income tax deductions, and it has ramped up its efforts to audit and investigate taxpayers who are suspected of fraud.

Tax Fraud Concerns About Conservation Easements

The IRS has identified several specific issues pertaining to improper deductions for constructive easements. Some examples of these issues include:

• Inflated Appraisals – Since the tax deductions available for conservation easements are based on property value, the IRS has raised red flags about appraisals that appear to fraudulently inflate the value of subject properties.
• Ineligibility for Constructive Easement Deductions – The IRS is also targeting taxpayers who claim constructive easement deductions when they are not eligible to do so. This includes both (i) failing to comply with the requirements for deduction eligibility and (ii) using property in a manner that is inconsistent with the terms of a constructive easement.
• Improper Deductions for Façade Easements – Claiming deductions for façade easements can lead to trouble for taxpayers who either are ineligible or who claim deductions larger than those to which they are entitled. As the IRS explains, if a façade is “already subject to restrictions under local zoning ordinances, the taxpayers may, in fact, be giving up nothing [and a] taxpayer cannot give up a right that he or she does not have.”

Participation in Syndicated Conservation Easements Puts Taxpayers Under the IRS’ Microscope

In addition to deductions claimed by individual historic property owners, the IRS is targeting taxpayers who participate in syndicated conservation easements as well. This is currently a “priority compliance area” for the agency. Last year, the IRS began sending settlement offers to taxpayers facing litigation pertaining to syndicated conservation easements, and the agency is continuing to aggressively pursue collection from individual and corporate taxpayers in 2021.

Questions or Concerns? Contact Virginia Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group

Do you have questions about federal income tax compliance pertaining to conservation easements? Are you currently facing an IRS audit or investigation? If so, we encourage you to contact us promptly. To speak with Virginia tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, in confidence, call 703-752-3752, email ket@thornlawgroup.com or contact us online now.