In our previous article, Conservation Easements Make the IRS Dirty Dozen Tax Scam List, we discussed why the IRS and the DOJ are increasingly getting tough with those who commit tax evasion through unwarranted charitable tax deductions on certain conservation easements. We saw that the primary offense is syndication of conservation easements and inflated appraisals of the land were it to be developed. In this article, we would like to address those who have made such an investment.
Let’s say that your client invested in a conservation easement with a syndicator in order to get a charitable tax deduction significantly more than their investment. Perhaps they even invested with what is perhaps the biggest syndicator, Eco-Vest, who the DOJ sued at the end of December 2018. What should they do to protect themselves from the IRS and the DOJ? Will they come after your client for tax evasion?
H2: Reporting Requirement
When a person makes this kind of investment, the syndicator sends them a K-1 form that shows a charitable contribution that is several times more than the amount they invested, maybe five, six, even nine times more. This is the amount they enter on their tax return. In the past, investors would have filled out their returns with the amount given to them and forgotten it.
H2: IRS and DOJ on the Warpath
But now in Notice 2017-10, the IRS is referring to these kinds of deals as “tax avoidance transactions”. That is, the IRS considers it as a “listed transaction” if the syndicator sent prospects promotional materials promising those who invest in a pass-through entity the possibility of a charitable contribution deduction that is at least two and one-half times the amount of their investment.
Not only that, but on December 18, 2018, the DOJ filed a complaint against EcoVest Capitol Inc, probably the largest syndicator and other parties. The complaint seeks the return of “ill-gotten gains” and an order to stop EcoVest “organizing, promoting, or selling an allegedly abusive conservation easement syndication tax scheme.” Then, on December 19, the Department of Justice issued a press release that said,
“The Department of Justice is working with our partners in the Internal Revenue Service to shut down fraudulent conservation easement shelters… Individuals investing in these schemes with benefits that seem too good to be true should ensure they are paying their proper federal income tax liability.
“…Cheating on your taxes will not be tolerated.”
H3: Already Filed a Return
The actions taxpayers should take depend on whether or not they have already filed a tax return claiming the charitable deduction for the conservation easement in which they invested. If your client already filed, they are audited, and the winds blow against them, it is possible they may need to pay back the amount they saved on their taxes with the charitable deduction – and pay a 40% penalty on top of that.
Should they amend? Use your own judgment, but if your client included the required disclosure on their tax return and indicated the amount they were given on their K-1, they will probably want to just sit tight and not amend (assuming the disclosures are correct). After all, they reported the amount they were given on their K-1.
H3: Not Yet Filed a Return
If your client got an extension to file their 2018 taxes, so much the better. Before they file their return, they could try to get their money back from the syndicator and get out of the deal. Of course, the syndicator is likely to be reluctant to do that, but it doesn’t hurt to try. If the syndicator refuses to pay, your client or you on behalf of your client, could file complaints with regulatory agencies in an attempt to force their hand. It is hard to say how effective this might be, but once again, your client is looking at a possible 40% penalty if they have to pay the deduction back.
Right now, the situation is in flux. By the fall, when those with extensions must file, it may be much clearer than it is now, so your client will know how to treat the conservation easement charitable deduction on their taxes.
EcoVest is fighting the DOJ, and they are ready to go to court. How this issue will be decided and where lines are drawn are still up in the air. Your clients will want to avoid any conservative easement syndication deals that exist only for the sake of huge charitable deductions. This issue should clarify later this year.