IRS Applied Blanket Fraud Presumption Despite Senate Findings of Isolated Abuse
The Gist
The Senate found that some people gamed the conservation-easement tax break with inflated appraisals, but the IRS then treated everyone who participated in these deals—including honest investors who just relied on appraisers—as if they were all guilty, rather than singling out the actual wrongdoers.
Conclusion
While a bipartisan Senate investigation found some genuine abuses (e.g., inflated valuations), the IRS improperly extended a presumption of fraud to all participants rather than pursuing only bad actors.
Premises
- The 2020 bipartisan Senate Finance Committee investigation into syndicated conservation easements documented specific, identifiable abuses—primarily inflated appraisals orchestrated by certain promoters—rather than finding fraud across the entire industry.
- IRS Notice 2017-10 designated syndicated conservation easement transactions as 'listed transactions,' which automatically triggered heightened scrutiny, reporting obligations, and penalty exposure for every participant in a qualifying transaction regardless of that individual's knowledge or intent.
- IRS audit and litigation practice in these cases has typically sought full disallowance of the charitable deduction and imposition of the maximum 40% valuation-misstatement penalty uniformly, rather than adjusting valuations or penalties based on each taxpayer's individual diligence or reliance on professional appraisals.
- Multiple tax practitioners, the National Taxpayer Advocate, and several Tax Court opinions have criticized the IRS's approach for failing to distinguish between transaction organizers/promoters who structured the abuse and passive investors who relied in good faith on third-party appraisals and legal opinions.
- Administrative and due-process norms generally require that punitive enforcement actions be calibrated to individual culpability rather than imposed categorically based on membership in a disfavored transaction class.
- The persistence of substantial litigation losses and settlements favorable to some taxpayers in conservation-easement cases suggests that not all participants in listed transactions were engaged in the abusive conduct the Senate investigation identified.
Assumptions
- The Senate investigation's finding of 'some' abuse was intended to identify specific bad actors rather than to justify treating the entire population of participants as presumptively fraudulent.
- A meaningful subset of conservation-easement investors lacked knowledge of, or complicity in, valuation inflation and acted on reasonable reliance on professional advice.
- Enforcement policy that fails to differentiate culpability among participants constitutes an overextension of the 'presumption of fraud,' even if not framed by the IRS in those explicit terms.