Conservation easements have typically been promoted as a way that high-income individuals could support land preservation while receiving substantial tax deductions. However, many syndicated conservation easement transactions have been under Internal Revenue Service (IRS) scrutiny in recent years.
The IRS Takes a Strong Stance
The IRS announced mandatory audits of these arrangements around 2017 and has since continued with meaningful enforcement over the years. Now, as these cases move through the U.S. Tax Court and settlements continue, investors face significant financial exposure, including the prospect of repaying disallowed deductions with years of accrued interest.
The IRS takes a firm position against many syndicated conservation easement deals, labeling them as abusive tax shelters. Such a strong stance has led to widespread disallowances and audits that often escalate to litigation.
Why Section 6603 Matters Now
As tax cases settle, many partners in these easement deals are realizing they may owe substantial amounts in tax payments to the IRS. However, rather than wait for final resolution in court (which could take one to two years, or more), taxpayers can minimize their interest accrual on potential liabilities in the form of Internal Revenue Code (IRC) 6603 deposits.
Under IRC 6603, taxpayers can make deposits to halt the accrual of interest. IRC 6603 deposits are not considered payments of tax, which means they do not trigger the statute of limitations for refunds and can be returned upon request. More importantly, they suspend the accrual of interest on the disputed amount from the date of deposit.
Conservation Easement Cases as a Perfect Fit for Section 6603 Strategy
IRC 6603 deposits offer a strategic advantage to address the high-dollar stakes and prolonged litigation timelines of typical conservation easement cases. Even though quarterly interest rates have dropped to seven percent from a longstanding eight percent, the cost of waiting is still expensive, but an IRC 6603 deposit means taxpayers can still act now to address their liability. These deposits can be tailored to specific tax years and liabilities, thereby protecting funds from being misapplied to subsequent years. But proper designation is critical: if the IRS treats the deposit as a payment, it could be used to offset unrelated liabilities, i.e., other owed taxes, defeating the purpose of making the deposit.
How Tax Professionals Add Value
Because understanding and implementing IRC 6603 requires precision, tax professionals can help clients in preparation. Specifically, they can provide the required written statement to identify the deposit as related to a disputable tax and also make sure the deposit is recorded with the correct IRS transaction code. This process is to make sure that the deposit functions as intended: to halt interest accrual and preserve the taxpayer’s rights and flexibility.
Windham Brannon Can Help
As more conservation easement cases are resolved unfavorably for taxpayers, resulting in additional tax liability, the use of IRC 6603 deposits is likely to increase. For investors facing potential repayments, this strategy offers a way to protect assets and reduce the financial impact of IRS enforcement. But success depends on getting the details right, from the language in the deposit letter to the mechanics of IRS processing. Windham Brannon’s Tax Controversy Practice professionals can help you submit conservation easement deposits that are compliant with the IRS, as well as plan for payments amidst your current tax strategy. For more information, contact your Windham Brannon advisor, or reach out to Tomika Bullet.
