IRS Notice 2023-54 Summary for Conservation Easements
Understand the implications of IRS Notice 2023-54. This guide details the criteria for affected conservation easements and resulting participant obligations.
The Internal Revenue Service (IRS) has intensified its focus on syndicated conservation easements it deems abusive. In response to these arrangements being used as tax shelters, the agency issued final regulations to define and regulate them. This guidance clarifies which transactions are subject to heightened scrutiny and reporting, aiming to curb transactions that exploit tax provisions intended for genuine land conservation.
This article summarizes the provisions within the regulations to help taxpayers and their advisors understand the rules and associated compliance responsibilities. It covers how to identify an affected transaction, the necessary disclosure steps, filing deadlines, and the consequences of failing to comply.
Identifying Affected Transactions
The final regulations define which syndicated conservation easement transactions are formally identified as “listed transactions.” This designation applies to a specific type of arrangement that meets a set of criteria. A primary indicator is the involvement of a promoter who organizes and markets the transaction to investors. These transactions involve a pass-through entity, such as a partnership, that holds real property.
A factor for identification is the content of the promotional materials provided to investors. If these materials suggest that an investor can expect to receive a charitable contribution deduction valued at two and a half times or more of their initial investment, the transaction falls under the regulations. The structure involves the pass-through entity donating a conservation easement on its property to a qualified organization and then allocating the resulting tax deduction among its investors. Any taxpayer who then claims this deduction is considered a participant.
These final regulations, issued in October 2024, replace a previous directive, Notice 2017-10, which the U.S. Tax Court had invalidated on procedural grounds. The new regulations were established to formally codify the reporting requirements. The IRS has also clarified that transactions involving the contribution of a fee simple interest in real property, rather than just an easement, can be considered “substantially similar” and are also subject to these rules.
Disclosure and Reporting Obligations
Once a transaction is identified as a listed syndicated conservation easement, specific disclosure and reporting duties are triggered for those involved. The primary obligation falls on participants, which includes any taxpayer whose return reflects the tax consequences of the transaction. Material advisors, who are individuals or firms that provide assistance or advice regarding these transactions for a fee, also have reporting responsibilities.
Participants must file Form 8886, Reportable Transaction Disclosure Statement, to inform the IRS of their involvement. Material advisors are required to file their own disclosure on Form 8918, Material Advisor Disclosure Statement.
Completing Form 8886 requires gathering specific details about the transaction. The filer must provide the name of the transaction and its tax shelter registration number, if one was provided. It is also necessary to report the tax year in which the taxpayer participated and the total amount of the charitable deduction claimed.
Filing Procedures and Deadlines
The procedural aspects of submitting Form 8886 are time-sensitive. The IRS established specific deadlines for compliance, which vary depending on when the participation in the transaction occurred. For transactions from prior years that are still within the statute of limitations, the IRS set a specific deadline to bring reporting up to date.
The filing process involves two distinct submission requirements. First, a standalone copy of the completed Form 8886 must be mailed to the IRS Office of Tax Shelter Analysis (OTSA) in Ogden, Utah. This centralized submission point allows the agency to track participation in listed transactions.
In addition to the standalone submission to OTSA, a second copy of the same Form 8886 must be attached to the taxpayer’s federal income tax return for each year of participation. For example, if a taxpayer claimed deductions from the easement over multiple years, a copy of the form must be included with each of those years’ tax filings.
Penalties for Non-Compliance
Failure to comply with the mandatory disclosure requirements for listed transactions carries significant financial penalties. The penalties are outlined in the Internal Revenue Code and apply to both participants and material advisors who neglect their reporting duties.
For taxpayers who participate in a listed transaction and fail to file Form 8886 as required, the penalty is 75% of the decrease in tax shown on the return as a result of the transaction. This penalty has a minimum of $5,000 and a maximum of $100,000 for individuals. For entities, the maximum penalty increases to $200,000.
Material advisors who fail to file the required disclosures are subject to a substantial penalty. The penalty is the greater of $200,000 or 50% of the gross income the advisor earned from the transaction. This amount can increase to 75% of the gross income if the failure to disclose was intentional.