Compliance
Avoiding Penalties: What to Know About Conservation Easement Cases and Settlement Opportunities
Abusive conservation easements are under IRS scrutiny—learn what the new settlement offer means, the litigation risks, and how to evaluate whether to settle or fight on.
By NomadicTax Research Team • 5-8 min read • June 3, 2026
## What Are Conservation Easements and Why the IRS Is Concerned
Conservation easements are legal arrangements allowing property owners to give up certain rights to preserve land or historical buildings. In exchange, owners can claim income tax deductions for charitable contributions. However, many **syndicated conservation easement (SCE)** transactions have been identified as abusive—valuations inflated, promoters misleading, deductions far larger than justified. The IRS has repeatedly disallowed such deductions and imposed large penalties. ([irs.gov](https://www.irs.gov/charities-non-profits/conservation-easements?utm_source=openai))
## Recent Policy: New Settlement Opportunity (IR-2026-65)
On **May 13, 2026**, the IRS announced **IR-2026-65**, a time-limited settlement opportunity for eligible taxpayers involved in conservation easement or historic preservation easement disputes. This initiative includes key concessions:
- No charitable contribution deduction allowed—possible “other deduction” equal to out-of-pocket costs. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-terms-of-a-time-limited-settlement-opportunity-for-eligible-taxpayers-involved-in-conservation-easement-disputes?utm_source=openai))
- Penalty reduced: gross valuation misstatement penalty drops to **10%**, then 20% if outside the initial period. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-terms-of-a-time-limited-settlement-opportunity-for-eligible-taxpayers-involved-in-conservation-easement-disputes?utm_source=openai))
- Payment not due when opting in; collection follows post-settlement. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-terms-of-a-time-limited-settlement-opportunity-for-eligible-taxpayers-involved-in-conservation-easement-disputes?utm_source=openai))
- Offers extended to previously ineligible or expired cases, bringing more potential for resolution. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-terms-of-a-time-limited-settlement-opportunity-for-eligible-taxpayers-involved-in-conservation-easement-disputes?utm_source=openai))
## Should You Settle or Litigate? Key Considerations
| Factor | Settling Offers | Litigation Risks |
|---|---|---|
| Financial exposure | Reduced penalties and deductions vs. full court outcome. If you settle early (within the first 90 days after the IRS letter), penalty is lower (10%). ([irs.gov](https://www.irs.gov/newsroom/irs-announces-terms-of-a-time-limited-settlement-opportunity-for-eligible-taxpayers-involved-in-conservation-easement-disputes?utm_source=openai)) |
| Timing | Letter deadlines: must act within **90 days** initially. After that, **45 days** with higher penalties. Default drops to typical outcomes with large penalties. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-terms-of-a-time-limited-settlement-opportunity-for-eligible-taxpayers-involved-in-conservation-easement-disputes?utm_source=openai)) |
| Case status | Docketed, on appeal, or already tried cases generally **not eligible**. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-terms-of-a-time-limited-settlement-opportunity-for-eligible-taxpayers-involved-in-conservation-easement-disputes?utm_source=openai)) |
| Documentation | If you lack strong valuation support or complete transparency, settlement can avoid massive costs in court. Litigation historically allows only ~6% of claimed deductions. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-terms-of-a-time-limited-settlement-opportunity-for-eligible-taxpayers-involved-in-conservation-easement-disputes?utm_source=openai)) |
## Practical Steps If You’re Affected
1. **Check your case status**: Is your easement case docketed, tried, or in Exam? If yes, settlement might not be available. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-terms-of-a-time-limited-settlement-opportunity-for-eligible-taxpayers-involved-in-conservation-easement-disputes?utm_source=openai))
2. **Wait for your IRS letter**: Eligible partnerships will receive individualized correspondence with specific terms. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-terms-of-a-time-limited-settlement-opportunity-for-eligible-taxpayers-involved-in-conservation-easement-disputes?utm_source=openai))
3. **Gather records**: Acquisition costs, appraisal reports, Schedule M-2, promoter agreements. These help compute “other deductions.”
4. **Calculate “other deductions” carefully**: The IRS uses out-of-pocket contributions and costs — often cash‐contributed amounts — not inflated appraised values. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-terms-of-a-time-limited-settlement-opportunity-for-eligible-taxpayers-involved-in-conservation-easement-disputes?utm_source=openai))
5. **Consider timing**: If you act in the 90-day window, penalty is 10%. Afterward, 20%. Missing both windows leaves standard court outcome with ≈40% penalties. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-terms-of-a-time-limited-settlement-opportunity-for-eligible-taxpayers-involved-in-conservation-easement-disputes?utm_source=openai))
## Example Scenario
- **Partnership A** entered into a syndicated conservation easement scheme in 2019. The IRS claims inflated value and issues audit; case becomes docketed in Tax Court in 2024. In 2026, IRS offers a settlement letter. Partnership A opts in within the first 90 days: they forego the charitable deduction, take memo of actual cash contributions (“other deductions”), and only pay a 10% penalty. Without settlement, court allows ~6% of claimed deduction and imposes 40% penalty. Settlement likely saves millions in downside risk.
## Takeaway
For those involved in conservation easement cases, the new settlement opportunity is a critical chance to limit penalty exposure, preserve cash flow by delaying payment, and avoid litigation uncertainties. But eligibility and precise documentation matter. Consult experienced tax counsel early, evaluate your case status, and decide quickly—windows are short.
Using settlement offers may mean giving up large deductions, but the risk of staying in the fight could be far worse—often ending with minimal deduction and massive penalties.