The IRS on May 13, 2026, published the terms of a time-limited settlement for partnerships and investors caught up in disputed syndicated conservation easement deals. The offer, previewed a week earlier, eliminates the charitable deduction but sharply reduces penalties for those who move quickly. It is the agency's latest attempt to clear a docket of more than 1,100 cases that have tied up high-income investors and the Tax Court for years.
What the IRS is offering
Under the terms in IR-2026-65, no charitable contribution deduction is allowed. Instead, a participating partnership receives an ordinary "other deduction" in an amount the IRS determines, generally approximating the partnership's out-of-pocket costs.
Timing drives the penalty. Partnerships that settle during an initial 90-day period face a 10% gross valuation misstatement penalty. In the 45 days that follow, the penalty rises to 20%. After those 135 days, the IRS says cases will be resolved only on a hazards-of-litigation basis, which it describes as typically producing a charitable deduction of about 5% to 7% of the amount claimed and a 40% penalty.
A partnership does not have to pay when it elects into the initiative. The resulting liability is handled through normal collection after the settlement is completed.
Who is affected
The IRS counts more than 1,100 conservation easement cases, roughly 740 in Tax Court and 400 still in examination. It says nearly 450 cases will benefit from the deferred payment feature, up to 500 cases that rejected earlier offers get a new opportunity and up to 175 cases become eligible for the first time. Prior initiatives resolved 405 cases, with a 32% acceptance rate.
Not every case qualifies. Excluded are cases already tried and awaiting an opinion, cases on appeal to a circuit court, cases already settled, cases bound to or designated as test cases unless all bound cases settle, and cases with trial starting within 30 days.
The investors most exposed are typically high earners who bought partnership interests in deals that claimed deductions several times larger than the cash invested. The IRS notes that the Tax Court has on average allowed only 6% of the original deduction and has generally imposed the 40% penalty plus interest.
The after-tax math
Example, simplified and in round numbers: an investor in the 37% bracket put $100,000 into a partnership and claimed a $500,000 easement deduction. Actual results depend on the partnership's costs, the investor's tax year, state tax and interest, which can be substantial.
| Outcome | Deduction allowed | Additional federal tax | Penalty |
|---|---|---|---|
| Settle in first 90 days | $100,000 other deduction (assumed) | $148,000 | $14,800 |
| Settle in next 45 days | $100,000 other deduction (assumed) | $148,000 | $29,600 |
| Litigate, Tax Court average | $30,000 (6%) | $173,900 | $69,560 |
In this illustration, settling early rather than losing at trial on average terms saves roughly $80,000 before interest. The comparison changes for any investor who believes a specific easement was properly valued, which is the core judgment in weighing settlement against litigation.
Questions to take to a tax attorney or CPA
- Whether the partnership qualifies, and who controls the election, since the decision is typically made at the partnership level under centralized audit rules.
- How much interest has accrued on the underlying tax, which the penalty figures above exclude.
- How state income tax returns for the same years would need to be amended.
- What the "other deduction" is likely to be, given that the IRS sets it based on the partnership's costs.
What to watch
The 90-day clock is the key date for any partnership that intends to participate. The IRS also said in its May 6 release that it would extend individual settlement offers to eligible partnerships after the terms were published, and it has continued to warn investors about promoters of these arrangements.
Sources
After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.
