In theory, conservation easements are a benefit to the public. When a landowner donates land to the government or a land trust for conservation purposes, they can deduct the value of that land from their taxes. This potentially contributes new land to public use and enjoyment, and the tax deduction works much like a charitable contribution deduction.
Syndicated easement deductions are different. The IRS has labeled these abusive. Promoters identify a parcel of land and get it appraised as worth many times its actual value. Then, they sell shares in the project to wealthy taxpayers who take massive deductions on the project. At least one advertisement promised $600,000 in deductions for every $100,000 invested.
The IRS and the Justice Department are aggressively enforcing tax law on both promoters and investors in syndicated easement deductions. But, according to ProPublica, they are having a hard time making a dent in the problem.
“Boy, it isn’t like the old days, when people were fearful of the IRS,” said one tax expert who spent 25 years with the IRS. These days, risk takers know that enforcement budgets are stretched.
IRS, Justice Department cracking down on the schemes
Don’t assume that the authorities can’t catch you. In addition to IRs enforcement efforts, the Justice Department is actively pursuing litigation against promoters of these kinds of deals. For example, ProPublica found that Justice has sued an Atlanta group called EcoVest Capital. The lawsuit claims that EcoVest has generated $1.7 billion in illegal federal deductions since 2009. ProPublica also found that EcoVest continues to advertise for projects in Texas.
If you notice an ad promising four or more times the deduction for your investment, be extremely wary. This is only possible if a fraudulent or abusive appraisal of the property, warns the IRS.
One reason syndicated easement schemes continue to operate is that the investor is often shielded from the cost of litigation with the IRS. However, the IRS also warns that involvement in such a scheme could result in broader investigations and audits — along with demands for back taxes, penalties of up to 40%, and interest.
Congress may be ready to tighten up the conservation easement deduction, limiting the deduction to two-and-a-half times the investment when the land has been owned for less than three years. In the meantime, taxpayers should be very cautious about this deduction.