Compliance
Compliance Deep Dive: IRS’ New Settlement Opportunity for Conservation Easement Disputes
The IRS is offering a time-limited chance to settle historic easement disputes—this article explains what taxpayers must know, how to evaluate risk, and examples of when settlement might win over litigation.
By NomadicTax Research Team • 5-8 min read • May 23, 2026
## The policy: Settlement Opportunity Explained
In **IR-2026-65**, issued May 13, 2026, the IRS announced a **time-limited settlement offer** for partnerships involved in conservation easement or historic preservation easement disputes. This affects cases in **Exam and Tax Court**, and those with prior offers or where previous opportunities expired. ([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))
### Key terms of the settlement offer
| Period | Gross Valuation Misstatement Penalty | Deduction Allowed | Up-front Payment Required? |
|--------|-----------------------------------------|--------------------|-----------------------------|
| First 90 days after IRS letter | **10%** | “Other deduction”—approx equal to out-of-pocket/ cash costs (no charitable contribution deduction) | **No** required immediately, collection post-settlement possible |
| Next 45 days (total 135 days) | **20%** | Same “other deduction” allowed | Similar terms with less favorable penalty |
| After offer expires | Court-type outcome—about 5-7% deduction, 40% penalty typical | Charitable contribution deduction heavily reduced | Litigation risks high |
| Eligible Cases | Partnerships with cases not tried, not on appeal, not already settled/test bouquets | | |
## Why this settlement matters
- Prior cases often resulted in **only ~6% allowed deduction**, along with **40% penalties** in court. The settlement’s 10–20% penalties and “other deduction” for costs are much more favorable. ([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))
- Not benefiting just dockets or appeals—it also reopens cases that were rejected before. Up to **1,100 cases**, including ~740 in court and ~400 in exam. About 500 expired offers can be revived; 175 cases that didn’t have offers may now participate. ([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))
## Actionable insights: Should you settle or litigate?
- **Analyze your current case status**: is your case docketed? On appeal? Already tried? If yes, the settlement may not be available. If no, you may be eligible.
- **Evaluate your claimed deduction vs out-of-pocket costs**: if you claimed a large inflated deduction based on property valuation, and your costs are far lower, the “other deduction” may give you less benefit, but trades off risk.
- **Compare penalties**: 10–20% via settlement vs 40% under litigation. The savings are significant.
- **Consider litigation risk and legal fees**: court battles are expensive, slow, and unlikely to go your way, given judicial track records.
## Example Scenario
Partnership A claimed $5 million in conservation easement deductions in a 2019 case. Court’s track record suggests they likely would win only $250,000 (≈ 5%) if litigated, plus 40% penalty. Under the settlement:
- If in **first 90 days**: penalty = 10%, deduction ≈ cost basis (say $500,000 in cash/out-of-pocket). They pay based on that instead, save huge headache and legal bill.
- If in 91-135 day window: penalty doubles to 20%—still drastically better than litigation.
## Risks & Limitations to Watch
- No charitable contribution deduction under settlement—may impact non-partnership investors who count that.
- Letter must be issued (you can’t just apply)—IRS will notify eligible partnerships.
- Once past deadlines or if case is on appeal, offer is gone.
- Interest still accrues; accepted liability is binding.
## Action Steps for Eligible Taxpayers
1. Check status of your case and whether you’ve received a settlement letter.
2. Consult with valuation experts to estimate deduction vs out-of-pocket costs.
3. Calculate penalty under both settlement and litigation.
4. Consider legal costs, timeline, certainty vs risk.
5. Respond quickly—adhere to 90-day or subsequent window after IRS letter. Missing deadlines means forfeiting favorable rates.
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This settlement is designed to shift cases toward resolution and away from litigation. For taxpayers saddled with equity valuations and high penalties, calculating the trade-offs may favor settlement sooner rather than later.