Case Studies

Settling Conservation Easement Disputes: What Eligible Taxpayers Need to Know

Explore the IRS’s new time-limited settlement opportunity for partnerships in conservation easement or historic preservation disputes—what it offers, who qualifies, and how to take action before time runs out.

By NomadicTax Research Team • 5-8 min read • May 26, 2026

## Overview of the New IRS Settlement Initiative The IRS has announced **IR-2026-65**, a **time-limited settlement opportunity** for eligible partnerships involved in **conservation easement or historic preservation easement disputes**. ([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)) This initiative aims to provide more favorable settlement terms than many cases have seen in court, including reduced penalties and less strict requirements for upfront payments. ([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)) ## Who Is Eligible? Partnerships may qualify if they have ongoing easement cases that meet these criteria: - **Not tried or pending appellate decisions** (i.e., Tax Court opinions not yet issued or cases not yet on appeal) - **Not already settled**, including via hazards of litigation or other agreements - **Have not been bound by decisions of test cases unless all bound cases have resolved** - **Cases with expired or rejected prior settlement offers** may also be eligible now for renewed 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)) ## Key Terms of the Settlement The initiative offers different tiers depending on when the taxpayer accepts: - **First 90 days after receiving a personalized settlement letter**: Gross valuation misstatement penalty of **10%**, no charitable deduction allowed, but an “other deduction” based on out-of-pocket costs may be permitted. No upfront payment required. ([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)) - **Following 45-day period (after those 90 days)**: Same overall structure, but penalty increases to **20%**. ([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)) - After both windows close (total ~135 days): Settlements default to terms consistent with risks of litigation—charitable contribution deductions greatly reduced (~5-7% of original claimed), penalties higher (often ~40%), and full court proceedings. ([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)) ## Why This Matters & Risk Factors - **Valuation risk**: Courts have generally disallowed most of the claimed deductions and imposed 40% penalties in these cases. ([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)) - **Potential savings**: Reduced penalties and ability to settle without upfront payment make this option much more attractive than litigating. - **Timeline pressure**: Once a taxpayer receives their individualized letter, timing is critical—waiting past the windows forfeits eligibility for favorable 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)) ## What To Do If Eligible 1. **Watch your mail**: Eligible partnerships will receive individualized correspondence from IRS with settlement 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)) 2. **Review valuation documentation**: Determine your out-of-pocket costs, documentation of contributed property values, and supporting schedules (like Schedule M-2 if applicable). 3. **Make an informed decision quickly**: The 90-day and 45-day windows are binding. Use them wisely to decide whether to accept or challenge further. 4. **Consult a tax professional**: Because of the high stakes in valuation and penalties, experienced legal counsel or valuation experts should be involved. ## Practical Example **Partnership A** claimed a $10 million conservation easement deduction in 2020. Their case is docketed but not yet decided. In May 2026, they receive an IRS letter offering settlement terms. If accepted in the first 90 days, they may pay a 10% valuation misstatement penalty (i.e., $1 million) and receive an “other deduction” reflecting their actual out-of-pocket costs (say, 2% of $10 million = $200,000), instead of losing almost all claimed deductions. Waiting past the 90-day window but not beyond 135 days will increase penalty to 20%, etc. If the case proceeds to court, they may lose most benefits and face 40% penalties. ## Actionable Insights - Maintain thorough and dated valuation and cost documentation now. - IRS expects cases to be resolved by **stipulated decision or closing agreement** depending on docket status. ([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)) - Don’t ignore past unsettled or rejected cases—you may get a second chance under this initiative. - Because no charitable deduction will be allowed if this settlement is accepted, ensure you understand the trade-off between immediate favorable terms vs potential higher benefits (but greater risk) from court outcomes. --- **Bottom line**: If you're part of a partnership with an unresolved easement dispute, receiving an individualized settlement letter grants you a rare chance for favorable terms—but with tight deadlines and significant trade-offs. Act swiftly and with professional guidance.