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)
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)
- 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)
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
- Check status of your case and whether you’ve received a settlement letter.
- Consult with valuation experts to estimate deduction vs out-of-pocket costs.
- Calculate penalty under both settlement and litigation.
- Consider legal costs, timeline, certainty vs risk.
- Respond quickly—adhere to 90-day or subsequent window after IRS letter. Missing deadlines means forfeiting favorable rates.
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.