IRS Accused of Backdating Penalty Approvals in Crackdown on Conservation Easement Tax Breaks

A detail of the Internal Revenue Service (IRS) headquarters building is seen in the Federal Triangle section of Washington, on April 27, 2020. (Chip Somodevilla/Getty Images)

The IRS has been accused by three Georgia businesses of backdating proposed penalty approvals for improperly claimed tax breaks on conservation deals, court filings show.

Petitions filed last week in the U.S. Tax Court by the three businesses—Arden Row Assets, LLC, Basswood Partners, LLC, and Delwood Partners, LLC—allege that an IRS supervisor intentionally and improperly backdated approvals for millions of dollars in penalties associated with so-called conservation easements.

Conservation easements are legal agreements in which property owners agree to restrict the use of their land for conservation purposes. By donating these easements as charitable gifts, they can claim tax breaks.

The IRS has been subjecting conservation easements to greater scrutiny, claiming that they’re subject to abuse by, for instance, overvaluing.

Michael Todd Welty, an attorney representing the three Georgia businesses, filed three separate “requests for admission” at the Tax Court on Aug. 16, requesting that the IRS admit that a revenue agent’s supervisor backdated his signature on penalty approval lead sheets.

The law requires IRS revenue agents to get a signed approval by their supervisor before sending out penalty notices to taxpayers, according to 26 U.S.C. § 6751(b)(1). The rule, which goes back several decades, was adopted in a bid to prevent rogue IRS agents from using improper tax penalties as a “bargaining chip” to pressure taxpayers into settlements, according to a Senate report (pdf).

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Mr. Welty said in the filings that the IRS revenue agent’s supervisor “backdated the penalty consideration lead sheet for this Matter by exactly 8 months from March 14, 2022, to July 14, 2021.”

The latest filings come during ongoing litigation against the IRS that the three businesses initiated on March 21, with Mr. Welty requesting in the recent documents that the tax agency admit to the accusations within 30 days.

The IRS didn’t respond to a request from The Epoch Times for comment by press time.

This isn’t the first time the IRS has been accused of backdating signatures on penalty approval sheets.

In a case involving LakePoint Land Group, which was also represented by Mr. Welty, the tax agency was also accused of backdating a document that determined penalties for the overvaluation of a conservation easement.

LakePoint alleged that not only did the IRS intentionally backdate a document needed to impose steep penalties for the misvaluation of a conservation easement, but IRS attorneys also failed to notify the Tax Court about the backdating and tried to hide that the IRS used the documents in penalty assessments.

The IRS has acknowledged what it described as an unintentional error in the LakePoint case, according to Politico.

Conservation Easements

A conservation easement is a legal agreement that restricts the development or use of a property for conservation purposes, such as to protect natural habitat or to preserve land for use by the general public for outdoor recreation or education.

By transferring a conservation easement to a charitable trust, the owner of the property can claim a charitable contribution tax deduction for the fair market value of that easement.

The IRS says it has seen abuses of this tax provision, with taxpayers (often encouraged by promoters) taking inappropriately large deductions for easements, the tax agency says in its guidelines on auditing conservation easements (pdf).

This conservation easement tax provision has proven difficult to administer and enforce and ranks among the top 10 most litigated issues between the tax agency and taxpayers, according to a Brookings Institution study (pdf).

A subset known as syndicated conservation easements has come into the IRS’s crosshairs in recent years, with the agency suspecting that some of these transactions were being used mostly for tax avoidance rather than genuine conservation.

Syndicated conservation easements made the latest IRS “Dirty Dozen” list of tax scams and other abusive practices.

“In abusive arrangements, promoters are syndicating conservation easement transactions that purport to give an investor the opportunity to claim charitable contribution deductions and corresponding tax savings that significantly exceed the amount the investor invested,” the IRS states on its website.

“These abusive arrangements, which generate high fees for promoters, attempt to game the tax system with grossly inflated tax deductions.”

In November 2019, the IRS announced a “significant increase in enforcement actions” targeting syndicated conservation easement transactions, identifying them as a “priority compliance area.”

“We will not stop in our pursuit of everyone involved in the creation, marketing, promotion and wrongful acquisition of artificial, highly inflated deductions based on these aggressive transactions. Every available enforcement option will be considered, including civil penalties and, where appropriate, criminal investigations that could lead to a criminal prosecution,” then-IRS Commissioner Chuck Rettig said in a statement.

There have been a series of prosecutions for issues related to overvaluing conservation easements, including one case where a North Carolina land appraiser pleaded guilty in May to a syndicated conservation easement tax shelter scheme that involved inflated charitable contribution deductions that claimed more than $1.3 billion in fraudulent tax deductions.