IRS Extends Deadline to File Forms 8886 for Participants in Conservation Easement Transactions
Individuals investing in Conservation Easement Transactions have many questions. Why is the IRS attacking Conservation Easements? Why do I have to file these extra forms? When do I file the forms and what are the risks if I don’t file the forms? Should I take the charitable contribution deduction and risk penalties if the IRS challenges the Conservation Easement?
The IRS is concerned about some Conservation Easement transactions because they believe that the promoters have inflated the value of the Conservation Easement and thus the amount of the charitable contribution deduction. The IRS is requesting the extra disclosures in order to more quickly discover and challenge deals involving inflated appraisals or deals that are problematic for other reasons. The additional penalties serve to encourage participants to file the disclosures.
Unfortunately given the heightened scrutiny involving Conservation Easements legitimate transactions may be challenged as well. Depending on the facts of each particular case the representative for the partnership may choose to settle the case rather than litigate with the IRS regarding the appropriate value of the easement. That could result in a deficiency for the taxpayer as well as possibly interest and penalties. Taxpayers who invested in syndicated easements in 2016 and are wary of potential penalties and interest may want to consider not claiming the deduction on their original tax return. The taxpayer can then file a protective claim for refund based on the charitable contribution. In this way, the taxpayer will receive the benefit of his charitable contribution as it is finally determined by the IRS without having to pay any penalties or interest.
Doing a protective claim for refund does not relieve the taxpayer of filing the required disclosures. On April 27, 2017, the IRS released Notice 2017-29 extending to October 2, 2017 the due date for participants in certain syndicated conservation easement transactions to file required disclosures. The original Notice 2017-10 released on December 23, 2016, made certain syndicated conservation easement transactions “listed transactions” for purposes of Treas. Reg. § 1.6011-4(b)(2) and IRC §§ 6111-6112. This created disclosure filing requirements for participants (Form 8886) and material advisors (Form 8918) to these transactions.
The original Notice 2017-10 required participants in certain syndicated conservation easement transactions to file Form 8886, Reportable Transaction Disclosure Statement, by June 21, 2017. That deadline has been extended to October 2, 2017. It also requires material advisors to file Form 8918, Material Advisor Disclosure Statement, by May 1, 2017. The deadline for material advisors was not extended by the new notice. Copies of both forms are to be submitted to the Office of Tax Shelter Analysis. Participants in listed conservation easement transactions in 2016 should also attach a copy of the Form 8886 to their 2016 income tax returns.
Failing to disclose listed transactions can result in steep penalties for taxpayers. IRC § 6707A imposes a penalty equal to 75 percent of the decrease in tax as a result of the transaction with a $100,000 maximum for individuals failing to file Form 8886. There is no reasonable cause exception for failing to file such disclosure. IRC § 6707 imposes a minimum penalty of $200,000 for material advisors who fail to disclose a listed transaction on Form 8918.