Internal Revenue Service, IRS establishes Office of Conservation Easements and transitions settlement process, Announcement IR-2026-95 (Aug. 19, 2026).

Internal Revenue Service, IRS announces terms of a time-limited settlement opportunity for eligible taxpayers involved in conservation easement disputes, Announcement IR-2026-65 (May 13, 2026)

On August 19, 2026, the Internal Revenue Service (IRS) announced a significant structural and tactical shift in its ongoing enforcement campaign against abusive conservation easements under Internal Revenue Code (I.R.C.) § 170(h). This pivot is characterized by two major developments: the immediate termination of the uniform settlement initiative established under the May 13, 2026 program (Announcement IR-2026-65) and the creation of a specialized, centralized Office of Conservation Easements (Announcement IR-2026-95).

The Strategic Pivot: Establishing the Office of Conservation Easements

To institutionalize its technical expertise and formalize its enforcement posture, the IRS has established the Office of Conservation Easements. This new office is designed to “centralize technical expertise and coordinate policy, enforcement, and case-resolution strategy across the IRS and with the Office of Chief Counsel.”

For practitioners representing clients with outstanding easement valuations, this Office represents a shift toward a more centralized and coordinated administrative approach. The Office of Conservation Easements will:

“Support engagement with taxpayers, practitioners, conservation and historic preservation organizations, and other stakeholders.”
“Work with Treasury to evaluate administrative and legislative options that advance Congress’s conservation and historic preservation objectives, promote consistent tax administration, and strengthen valuation integrity.”

Once fully operational, the Office will serve as the primary “central coordination and a channel for general inquiries,” though specific contact information and organizational details are slated for a separate announcement.

Deconstructing the Abandonment: Why the IRS Is Ending the May 13 Uniform Initiative

Effective August 19, 2026, the IRS has formally concluded its current uniform settlement initiative, ending the issuance of uniform settlement letters under the May 13 program. Under this transition, “any deadlines for accepting previously issued offers are withdrawn.” Prior elections to participate in the May 13 framework that have already been submitted will remain in effect and will be processed in accordance with their terms.

The decision to abandon the rolling, standardized offer program stems from practical administrative challenges. According to the IRS, “experience administering the initiative, together with engagement with taxpayers, has shown that standardized, unsolicited settlement letters on a rolling basis, each with a fixed response period, are not well suited to the full range of conservation easement cases.”

In particular, the IRS noted that “partnership agreements, insurance arrangements, procedural posture, and other circumstances may differ materially and affect when and how taxpayers evaluate settlement.” Because these transactions involve complex, multi-tiered partnerships and customized financial arrangements, a “one-size-fits-all” rolling deadline failed to accommodate the operational realities of the various docketed and non-docketed cases.

Retrospective Analysis: The Terms of the Withdrawn May 13 Settlement Initiative

To advise clients who may still have pending cases, practitioners must understand the specific terms of the May 13, 2026 initiative (IR-2026-65) that have now been withdrawn from the rolling program. Under that time-limited opportunity, the IRS sought to resolve an estimated 1,100 pending cases (approximately 740 docketed in Tax Court and 400 cases in Examination).

The withdrawn May program offered eligible partnerships individualized correspondence on a rolling basis. Upon receiving their letter, partnerships had a strict 90-day response window to accept the following highly structured terms:

Complete Disallowance of Deductions: No charitable contribution deduction under I.R.C. § 170 was allowed.
Out-of-Pocket Cost Deduction: In lieu of the charitable deduction, the IRS allowed an “other deduction” in an amount equal to the partnership’s approximate out-of-pocket costs. This was “often based on cash-contributed amounts reflected on Schedule M-2” of Form 1065 (Partnership’s Analysis of Partners’ Capital Accounts).
Reduced Penalty Rate: A gross valuation misstatement penalty under I.R.C. § 6662(h) was applied at a significantly reduced rate of 10% (down from the standard statutory rate of 40%).
Interest: Interest accrued on the underpayment as required by law.
Payment Terms: The partnership was not required to make an upfront payment of the settlement amount at the time it elected into the initiative, a relief designed for approximately 450 cases that had faced liquidity barriers under prior 2020 initiatives.
Resolution Mechanisms: Non-docketed Bipartisan Budget Act (BBA) cases were resolved via a closing agreement under I.R.C. § 7121, while docketed Tax Court cases were resolved by a stipulated decision under Tax Court Rule 91.
No Extensions: The 90-day period was strictly non-extendable.

Following the initial 90-day window, a secondary 45-day window (totaling 135 days from the postmark date) was offered. During this secondary window, the terms remained identical except that the gross valuation misstatement penalty under I.R.C. § 6662(h) doubled to 20%.

If a partnership failed to elect into the program within the 135-day combined period, any subsequent settlement prior to a formal court decision would be governed strictly by the “hazards of litigation.” Under general IRS hazard guidelines, this resulted in a severely restricted charitable contribution deduction of only 5% to 7% of the claimed amount, accompanied by the full statutory 40% gross valuation misstatement penalty under I.R.C. § 6662(h).

Administrative and Collection Mechanics: TEFRA vs. BBA Partnership Regimes

For partnerships that previously elected into the May 13 framework—or those who wish to request these terms on a case-by-case basis going forward—the administrative and collection mechanisms differ materially based on the applicable partnership audit procedures.

TEFRA Partnerships (Tax Years 2017 and Earlier)

For cases governed by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (former I.R.C. §§ 6221-6234), the tax adjustments are resolved at the partnership level, but collections are processed at the partner level. Taxpayers “should expect to receive IRS notices stating the amount owed by each investor.” These individual notices are issued “following IRS processing after the settlement is reached and the Tax Court decision becomes final.”

BBA Partnerships (Tax Years 2018 and Later)

For partnerships subject to the Bipartisan Budget Act of 2015 (BBA) (I.R.C. §§ 6221-6241), the default rule is that the partnership itself is liable for any imputed underpayment. Under the transitioning settlement framework, collection operates as follows:

No Push-Out Election: If the partnership did not elect to push out the liability under I.R.C. § 6226, the partnership is directly responsible for paying the settled amount. However, if the partnership is “unable to pay, investors will receive notices from the IRS stating the amounts owed as a result of the settlement adjustments.”
Push-Out Election: If the partnership successfully makes an election under I.R.C. § 6226 to push out the liability, “the partnership must furnish statements to investors and the IRS describing the adjustments and amounts being pushed out.” Consequently, individual “investors must take those adjustments into account accordingly” on their own tax returns.

The Judicial Landscape and Continuing IRS Enforcement

The termination of the uniform settlement initiative does not represent an administrative retreat or a softening of the IRS’s enforcement position. The IRS continues to emphasize that taxpayers face extreme litigation risks if they continue to contest these transactions.

In recent litigation before the United States Tax Court, the federal government has consistently prevailed. 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.”

The IRS has made it clear that this transition “does not signal a new or more favorable standardized offer.” Instead, “it ends issuance of uniform offers and deadlines.”

Acting IRS Chief Counsel Kenneth J. Kies highlighted the judicial consensus and the risks of litigation, stating:

“The courts have repeatedly found abusive activity in this area, regularly sustaining major reductions in claimed deductions and significant penalties and interest. Taxpayers and their advisors should carefully review the terms of this initiative and the substantial litigation risks of continuing to contest these cases.”

Furthermore, IRS Chief Executive Officer Frank J. Bisignano reiterated the underlying policy directive:

“Congress created the conservation easement deduction to encourage genuine preservation, not to subsidize tax shelters built on inflated valuations. This settlement opportunity gives eligible taxpayers a chance to resolve these cases on terms more favorable than the results taxpayers have generally achieved in court, while allowing the IRS to continue enforcing the law in a fair and efficient way.”

For clients with ongoing disputes, practitioners should note that taxpayers with pending cases “may continue to request settlement under the May 13 framework through their assigned IRS examination or Chief Counsel representative.” If the individual case remains eligible under standard administrative guidelines, “the IRS will issue a new offer on the same standardized terms.” However, the IRS retains the flexibility to resolve individual cases on different terms “where warranted by the hazards of litigation.”

Prepared with assistance from Gemini Notebook.