The IRS’ creation of an Office of Conservation Easements marks a change in how the agency resolves thousands of easement disputes, and Shawn O’Brien, a tax partner at McDermott Will & Schulte, said the agency should use the transition to settle cases more efficiently and communicate better with taxpayers.
O’Brien, whose firm advises investor partners on settlement decisions, said delays that can leave taxpayers waiting up to two years for a final bill, while interest accrues, are a problem the office should address.
New easement office established, May framework replaced
The IRS announced the office in an August 19 news release, ending the uniform settlement initiative it began in May. The agency said the new office will centralize expertise for the more than 1,100 conservation easement cases pending in the U.S. Tax Court and under IRS examination. The office will coordinate policy, enforcement, and case-resolution strategy with the Office of Chief Counsel and work with the Treasury Department on administrative and legislative options and on valuation integrity.
In recent litigation, the government has generally prevailed, the IRS said, with the Tax Court on average allowing about 6% of the claimed deduction and imposing a 40% gross valuation misstatement penalty, plus interest.
The August announcement was a pivot from the settlement program the IRS detailed on May 13. That initiative offered standardized terms to a broad group of taxpayers, requiring them to give up the disputed charitable deduction and accept a 10% penalty, with 90 days to decide. O’Brien said the move to a dedicated office may reflect limited uptake of that offer.
“My sense is that maybe the IRS wasn’t getting the acceptances, or people were waiting to decide, and so they decided to go in a different direction with this new office,” O’Brien said.
He said a specialized office might appear to add work but could ultimately prove more effective at clearing the backlog. “You would think that would be more administratively burdensome on the IRS, but maybe it’s a way to be more efficient, and I hope that is the case,” he said.
Asked about the agency’s broader shift toward digital communications, O’Brien said resources would drive the office’s approach but predicted its correspondence would be more tailored than routine notices. “I don’t think this is going to be like some of these notices you see where they’re just computer generated,” he said. “I think these are going to be more customized.”
He also said he hopes the office will expand who is able to settle. Whether eligibility has changed has not been disclosed, he said, but if the agency wants to resolve a large share of the cases, “you would think that you’d loosen the eligibility some.”
Delays weigh on taxpayers
One area the office could improve, O’Brien said, is the administrative delay in finalizing settlements after a taxpayer agrees to terms. “I think one of the things that office could really do better than what’s happened in the past is just the efficiency in settling the cases,” he said. Taxpayers have been told that, for some tax years, the IRS could take one to two years to process a settlement, calculate the amount owed, and finalize it, a wait he called “ridiculous.” Underpayment interest continues to accrue during that period.
“If someone’s made a decision that they want to settle, they want certainty,” O’Brien said. “If the IRS can’t tell them precisely how much they’re going to owe and give them a bill in a shorter time frame than a year to two years, that’s weighing on people as well.”
The timeline depends on the tax years involved. O’Brien said that for cases under the Tax Equity and Fiscal Responsibility Act, generally 2017 and earlier, the IRS could take up to 24 months after a settlement is finalized to send notices to individual investors, while cases under the Bipartisan Budget Act, covering 2018 and later, could take up to 18 months.
Deposits could limit interest
Given those delays, O’Brien said the office should make taxpayers aware of ways to limit their interest costs, chief among them a deposit under IRC § 6603, which lets a taxpayer post what functions as a bond to halt interest on a potential liability while a dispute continues. He noted that the May settlement terms said interest would apply but did not explain how to stop it, saying the terms do not “say anything about how you could stop interest from running.”
“I do think that the office should at least make people aware that this is a path to save on the interest,” O’Brien said. Building that guidance into the office’s outreach, he added, would be a matter of “good tax administration” that the IRS should weigh for its next round of communications.
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