IRS Conservation Easement Settlement: 90-Day Window, 10% Penalty — Then Terms Worsen

Key takeaways

• The clock is 90 days, then 45, then over. A 10% § 6662(h) penalty applies if you accept in the first 90-day window; it becomes 20% in the following 45-day window, and the IRS will grant no extension of either period.
• The deduction is gone either way. Settlement allows zero charitable contribution deduction and substitutes an "other deduction" equal to the partnership's approximate out-of-pocket costs as determined by the IRS.
• Nearly 450 cases owe nothing upfront. For those matters, the settlement liability is handled through post-settlement collection rather than payment at signing — a real cash-flow variable in the accept/decline math.
• The litigation alternative is bleak. The Eleventh Circuit's March 25, 2026 decision in *Jackson Crossroads* affirmed 40% penalties and allowed roughly 5% of the claimed deduction in Jackson Crossroads itself (about 11% in the consolidated Long Branch matter); the IRS reports a 6% average allowance across the Tax Court docket.
• Settle the partnership, but reckon at the partner level. Confirm the TEFRA or BBA posture and model each partner's exposure before the partnership representative signs.

What IR-2026-65 actually offers

The settlement reaches a defined population: more than 1,100 syndicated conservation easement cases, of which approximately 740 are docketed in Tax Court and roughly 400 remain in examination. The terms are uniform and non-negotiable.

The partnership concedes the entire charitable contribution deduction. In its place, the IRS allows an "other deduction" in an amount it determines — generally equal to the partnership's approximate out-of-pocket costs, meaning cash actually spent acquiring and placing the property, not the appraised easement value. A gross valuation misstatement penalty under § 6662(h) then attaches, and its rate is the variable the initiative is built around.

The window structure is the core of the decision, and it runs on two consecutive, hard-edged deadlines. The timeline below lays out the two windows and the penalty rate attached to each.

The discipline is the point. The IRS has stated plainly that no extension of the 90-day period will be available, and none of the subsequent 45-day period either. After day 135, the offer is withdrawn and the case proceeds on the merits. There is no third bite.

Cash flow is the other lever. For nearly 450 of these cases, the IRS has removed the upfront-payment requirement that accompanied earlier easement settlement programs; instead, the agreed liability is subject to post-settlement collection. That does not change what is owed, but it changes when — and for a leveraged partnership or a fiduciary managing distributions, that timing can change the decision.

Accepting in the first window does not cost you the deduction you would otherwise keep — that deduction is, on this record, already lost. It costs you a 10% penalty instead of a 20% or 40% one.

What "decline" means

A case that does not settle reverts to a hazards-of-litigation posture. The IRS has described that posture concretely: a charitable contribution deduction of roughly 5% to 7% of the amount claimed, paired with a 40% gross valuation misstatement penalty. Against the settlement's 10% penalty and out-of-pocket "other deduction," the gap is the penalty rate plus the interest that compounds while the case is litigated.

Why the litigation alternative keeps getting worse

The settlement is priced against the courtroom, and the courtroom has been moving in one direction. Across the docket, the Tax Court has allowed only about 6% of the original claimed deduction on average and has generally imposed the 40% § 6662(h) penalty.

The most recent appellate signal reinforces that. On March 25, 2026, the Eleventh Circuit decided *Jackson Crossroads LLC v. Commissioner* (Nos. 25-10744, 25-10745), affirming the 40% gross valuation misstatement penalty and sustaining only a fraction of the claimed deductions — approximately 5% in the Jackson Crossroads matter (about $1.17 million allowed against $23.1 million claimed) and roughly 11% in the companion Long Branch matter. The court worked through the standard battleground — before-and-after valuation, highest-and-best-use, discounted cash flow — and reached the result that has become familiar.

Critically, the court confirmed that the reasonable cause defense under § 6664(c)(3) is unavailable for charitable-deduction property once the claimed value equals or exceeds 200% of the correct amount — precisely the posture of a syndicated deal underwritten to a multiple.

*Jackson Crossroads* is not a one-off. It is a data point confirming that the penalty is hard to escape, the allowed deduction is thin, and every additional year of litigation adds interest on top of a result that already looks like the settlement's worse tier.

Frequently asked questions

How do I know if one of my positions is covered?

The initiative covers syndicated conservation easement cases that are either docketed in Tax Court or under examination. Identify every open or docketed easement position across your partnerships, then confirm with the examining agent or Counsel attorney whether a settlement letter has issued or is expected. Eligibility is case-specific; do not assume a position is in or out without confirmation.

When does the 90-day clock start?

From the settlement letter for each case — not from the May 13 announcement and not on a single program-wide date. Calendar each letter independently. The 10% penalty rate is available only inside that first 90-day window; it becomes 20% in the next 45 days, and there are no extensions.

We have a strong appraisal. Is litigation still viable?

It can be, but the bar is high and rising. Courts have allowed about 6% of claimed deductions on average and routinely imposed 40% penalties, and the § 6664(c)(3) reasonable cause defense is foreclosed where value equals or exceeds 200% of the correct amount. Model your specific facts against that benchmark plus compounding interest before declining — a genuinely defensible appraisal is the exception, not the deal.

Who signs, and who bears the cost?

The partnership resolves the matter, but the economics land on the partners. Confirm whether the partnership is under TEFRA or BBA, identify how an adjustment and penalty flow to each partner, and have the partnership representative coordinate partner-level consequences before signing. A signature that is procedurally clean but blindsides partners is not a clean settlement.

Bottom line

Treat IR-2026-65 as a calendared event, not a reading item. Within the next several days, inventory every open or docketed syndicated easement position, confirm which fall inside the initiative, and diary the 90-day deadline from each settlement letter. For each case, run the real comparison: a 10% penalty with an out-of-pocket "other deduction" now, versus a roughly 6% allowed deduction, a 40% penalty, and years of accruing interest later — adjusting for the nearly 450 cases that owe nothing upfront. Where the numbers favor settling, move inside the first window; the 20% tier and the no-extension rule mean hesitation has a fixed, knowable price. Resolve the partnership-level procedure and partner-level effects before the partnership representative signs.