“IRS announces terms of a time-limited settlement opportunity for eligible taxpayers involved in conservation easement disputes,” News Release IR-2026-65, May 13, 2026

On May 13, 2026, the Internal Revenue Service issued News Release IR-2026-65, announcing a "time-limited settlement opportunity for eligible taxpayers involved in conservation easement or historic preservation easement disputes with the IRS". As practitioners representing partnerships and investors in these transactions are acutely aware, the scrutiny surrounding deductions for qualified conservation contributions—governed by I.R.C. § 170(h)(1)—has intensified. This settlement initiative alters the landscape for resolving protracted disputes, offering structured terms that diverge from prior IRS settlement programs.

Background and Rationale for the Settlement Program

The tax code provides an allowance for a "qualified conservation contribution" under I.R.C. § 170(h)(1), provided it is made to a qualified organization exclusively for conservation purposes. However, the IRS and the courts have aggressively challenged syndicated transactions for gross valuation misstatements. IRS Chief Executive Officer Frank J. Bisignano stated that "Congress created the conservation easement deduction to encourage genuine preservation, not to subsidize tax shelters built on inflated valuations". Acting IRS Chief Counsel Kenneth J. Kies further warned that "The courts have repeatedly found abusive activity in this area, regularly sustaining major reductions in claimed deductions and significant penalties and interest".

While the IRS has offered settlement initiatives since 2020, which historically accepted 32% of offers and resolved 405 cases, prior iterations required taxpayers to "pay penalties on their underpayments" and permitted "solely to a deduction for estimated out-of-pocket costs," completely disallowing any charitable contribution deduction.

This new program is expressly "intended to advance the goals of the prior initiatives while addressing barriers that may have discouraged acceptance". The most significant barrier addressed is the elimination of the upfront payment requirement for many taxpayers. The IRS’s willingness to restructure the program stems from a commanding record in litigation; the government notes that, on average, "the Tax Court has only allowed 6% of the original claimed deduction and has generally imposed a 40% gross valuation misstatement penalty, plus interest". Under I.R.C. § 6662(h)(1), a gross valuation misstatement normally mandates a penalty rate of 40% rather than the standard 20% accuracy-related penalty.

Eligible Taxpayers

The IRS indicated there are "over 1,100 conservation easement cases (around 740 docketed cases in Tax Court and 400 cases in Exam)" currently pending. The settlement opportunity is extended to the following specific groups:

Current Cases Relieved of Upfront Payments: "nearly 450 cases will no longer be required to make an upfront payment of the settlement amount, and instead the liability will be subject to post-settlement collection".
Previously Expired or Rejected Offers: The IRS is granting "as many as 500 cases where prior settlement offers expired or were rejected by the taxpayer" the "renewed ability to settle their cases".
New Participants: The initiative "will also be extended to as many as 175 cases that did not previously have the opportunity to participate in an IRS settlement initiative".

Eligible partnerships "will receive individualized correspondence, to be issued on a rolling basis, from the IRS setting forth their specific settlement terms".

Excluded Taxpayers

The IRS strictly curtails eligibility based on a partnership's current procedural posture. The settlement opportunity is expressly "not available in cases" falling into the following categories:

"That have been tried and are awaiting an opinion".
"That are on appeal to one of the United States Circuit Courts of Appeal".
"That have already settled (i.e., settled based on hazards of litigation before trial or conceded, including those in which no decision has been entered)".
"That have agreed to be bound to another case if the test case has been tried and is awaiting final decision".
"That have a trial that is set to commence within 30 days of the date of this announcement".
"That are designated as test cases, unless all bound cases have settled or agree to settle under this initiative".

Ultimately, the IRS retains discretion, determining eligibility "based on the status of the case and other case-specific considerations relevant to administration of the initiative".

Terms of the Settlement Program

The terms of the initiative operate on a strictly enforced, rolling timeline that begins "on the postmark date or date of electronic transmission" of the individualized IRS settlement letter. Practitioners must be highly vigilant regarding these deadlines, as the financial consequences of missing the initial window are severe.

The Initial Ninety-Day Window

"For a period of 90 days following the issuance of a settlement letter," eligible partnerships may agree to the following terms:

"No charitable contribution deduction will be allowed".
The IRS will permit an "'other deduction,' in an amount determined by the IRS, generally equal to the partnership's approximate out-of-pocket costs". The release notes this is "often based on cash-contributed amounts reflected on Schedule M-2".
The severe 40% penalty under I.R.C. § 6662(h) is mitigated; instead, a "gross valuation misstatement penalty will apply at a rate of 10%".
"Interest will accrue as required by law".
The partnership "will not be required to make payment at the time it elects into the initiative".

Procedurally, "Docketed cases will be resolved by stipulated decision," while "Non-docketed Bipartisan Budget Act cases will be resolved by closing agreement or similar document". The IRS warns that "No extension of the 90-day period will be available".

The Subsequent Forty-Five-Day Window

If the initial deadline is missed, taxpayers have "a period of 45 days following the close of the initial 90-day period" where they "may settle on generally the same terms, except that the gross valuation misstatement penalty will apply at a rate of 20%". Again, "No extension of the 45-day period will be available".

Expiration of the Settlement Opportunity

Once the combined 135-day window closes, "cases will be resolved before a court decision only on the basis of hazards of litigation". The IRS cautions that a hazards of litigation settlement "will reflect a charitable contribution deduction of approximately 5% to 7% of the claimed deduction and a 40% gross valuation misstatement penalty".

Entity-Level Procedural Mechanics

The implementation of the settlement adjustments depends on the partnership tax regime in effect for the tax year in question:

TEFRA Partnerships: For cases "generally involving tax years 2017 and earlier," the IRS will process the adjustments, and investors "should expect to receive IRS notices stating the amount owed by each investor" after the Tax Court decision becomes final.
BBA Partnerships: For cases "generally involving tax years 2018 and later," the liability falls on the partnership "if the partnership did not elect to push out the liability". If the partnership cannot pay, investors will receive notices from the IRS. If the partnership elected the push-out provisions, it "must furnish statements to investors and the IRS describing the adjustments and amounts being pushed out, and investors must take those adjustments into account accordingly".

Prepared with assistance from NotebookLM.