Conservation Easement

A conservation easement is a securitized corporate structure that owns real estate. The landowner(s) sells the right to develop that land in exchange for favorable tax deductions. In many instances, investors are enticed with tax deductions worth multiples of the principal amount of the investment. These investment opportunities are pooled together so that they can be marketed and sold to a broad audience of investors across the country. In theory, there is less development and impact to the ecosystem, which makes the investments also appear socially conscious. Through a network of brokerage firms and Financial Advisors, retail investors are sold these opportunities and, in exchange, receive high commissions. However, the issuers of the conservation easements and the brokerage firms that are marketing and selling them to retail investors do not have opinion letters from the IRS confirming the advantageous tax treatment. The IRS and Department of Justice (DOJ) are believed to be narrowing in on selling groups who were involved in the marketing and sale of these fraudulent products. In November 2019, the IRS issued a notice indicating that it was “increasing its enforcement actions for syndicated conservation easement transactions, a priority compliance area for the agency.” https://www.irs.gov/newsroom/irs-increases-enforcement-action-on-syndicated-conservation-easements. The IRS went on to state that “we will not stop in our pursuit of everyone involved in the creation, marketing, promotion and wrongful acquisition of highly inflated deductions based on these aggressive transactions.” The conservation easement investments were among the “dirty dozen” investments. In a recently filed case against a large conservation easement issuer, Ecovest Capital, Inc., the Department of Justice alleges that the Ecovest conservation eastment was nothing more than “the sale of grossly overvalued federal tax deductions under the guise of investing in a partnership.” https://www.justice.gov/opa/press-release/file/1121451/download. The essence of the scheme involved the overvalued appraisal of the underlying property which, in turn, causes investors to improperly claim artificially inflated deductions on their personal tax returns. If and when the IRS determines that Ecovest and other conservation easement issues overstated the value of their properties in order to maximize the attractiveness of the investment, and nullifies the tax deductions, investors will potentially be on the hook for unpaid taxes in arrears, plus applicable penalties. In June 2020, the IRS announced a “time-limited settlement offer” to taxpayers with pending docketed Tax Court cases involving conservation easements. The IRS went on to say that it “will continue to actively identify, audit and litigate these syndicated conservation easement deals as part of its vigorous and relentless effort to combat abusive transactions,” said IRS Commissioner Chuck Rettig. “These abusive transactions undermine the public’s trust in private land conservation and defraud the government of revenue. Ending these abusive schemes remains a top priority for the IRS.” If your Financial Advisor recommended that you invest in conservation easements or other tax shelters, you may be able to recover your investment losses, including adverse tax consequences and penalties, through a FINRA arbitration claim.

Unreported Bank Leumi or Mizrahi Tefahot Bank Account?

By Brian M

You are new to this blog; you already know that we write many articles about offshore tax compliance and in particular, the need to disclose foreign bank and financial accounts. Generally, the IRS operates on a first contact policy meaning if you contact them before they find you, it’s possible to avoid audit, criminal prosecution and the harshest of penalties. (Unreported foreign accounts can carry a penalty as high as $100,000 per account or 50% of the highest account balance for each year the account was not properly disclosed.)

There are exceptions to that policy and they include situations where the IRS had already obtained your name from a cooperating bank – even if the IRS had not first contacted you. Many taxpayers were stunned this week when the IRS elected to rescind participation to many folks already accepted into the offshore amnesty program. From what we can piece together, these folks all had accounts at Bank Leumi and possibly Mizrahi Tefahot Bank.

What happened?

That’s something being asked by many tax lawyers and CPAs. Officially, the IRS can’t answer those questions because of taxpayer confidentiality laws. It appears, however, that the IRS dusted off the amnesty rule that says participation can be denied to folks whose names had already been disclosed.

At first, that sounds reasonable, however, in this case the IRS had already sent acceptance letters to these folks. The IRS’ stated mission is to promote voluntary compliance. That mission is seriously jeopardized when the IRS pulls the rug out from folks who in good faith came forward and tried to do the right thing.

The problem may lie within the IRS computer systems. The organization is so big that the folks running the amnesty program don’t know what is happening in other places within the IRS. Your name could be sitting on an auditor’s desk for months yet the people issuing the acceptance letters have no idea that your account has already been identified. Mistakes happen but taxpayers shouldn’t be punished for the IRS’ own errors.

Already the IRS’ own taxpayer advocate has publicly reported the agency’s failure in communicating the need to disclose offshore accounts. Kicking folks out who have already been accepted will only further hurt the agency’s credibility.

Foreign bank and financial accounts (that includes hedge funds, some insurance vehicles, CDs and brokerage accounts) must be reported annually on a Report of Foreign Bank and Financial Accounts or FBAR form. Failure to report could be a felony and also subject you to huge civil penalties. The IRS has been running an amnesty program to encourage people with unreported accounts to come forward, avoid audit and prosecution and receive a break on penalties. Thousands came forward and were accepted into the program.

This week we learned that some folks with Bank Leumi and Mizrahi Tefahot accounts in Israel were later tossed from the amnesty program even after they had previously been sent acceptance letters. This suggests that the IRS already had their names and account information from these banks. If so, those account holders are not eligible for amnesty but may still be able to avoid prosecution and receive a break on penalties if they can demonstrate that their failure to file an FBAR was because of mere negligence or ignorance.

Getting tossed from the program isn’t necessarily the end of the world for most taxpayers but it means more stress, an audit, higher legal fees and the possibility of much higher penalties. For some, it also means the possibility of prison. If the IRS already had their names, attempting to hide wouldn’t have worked anyway.

The take away from all this is that time is running out. Soon foreign banks will be required to identify and report U.S. account holders and many are doing so already pursuant to John Doe subpoenas and existing tax exchange treaties. The message from the IRS is clear. Get to us before we get to you (or get your name).

Because the IRS does not publicize the names of banks that are under investigation or cooperating, it’s impossible to know what banks have turned over names and when. The sooner one comes forward, however, the better the chances of avoiding the worst penalties.

This is a very good article. I do not agree with all of it. I think if you file and opt out you will get much better results with the IRS and with the IRS fines. Make sure that you use someone who knows what he is doing. Do not pay a CPA or attorney to learn on the job. For more on this Google Lance Wallach or contact him.