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Conservation Easements – the next wave of malpractice claims against accountants and tax preparers?

Accountants Professional Liability Insurance

Conservation Easements – the next wave of malpractice claims against accountants and tax preparers?

By Ralph Picardi, Esq. and Rickard Jorgensen, FCII, ARM, ACIArb.

Because of a recent uptick in enforcement actions by the Internal Revenue Service, accountants’ professional liability insurers are beginning to pay attention to the potential of claims arising from the sale of these alternative investment products. They are a type of tax shelter which is a deeded transfer of an interest in real property to a qualified charity that results in a tax deduction in exchange for the contribution. The purpose is to conserve or protect the land or its resources for future generation.

However, the conservative easement allows owners to retain other private property rights and to live on and use their land. A conservation easement is legally binding. The easement creates a legally enforceable land preservation agreement between a land owner and a government agency. The restrictions of the easement run with the land. Conservation easements are binding on all future owners of the property.

The following is an example of a federal statute defining the term:

“Pursuant to 16 USCS § 460nnn (4) (A), the term ‘conservation easement’ means “a binding contractual agreement between the Secretary and a landowner in the Cooperative Management and Protection Area under which the landowner, permanently or during a time period specified in the agreement, agrees to conserve or restore habitat, open space, scenic, or other ecological resource values on the land covered by the easement.”

In the past few years, syndicates have been formed to package and promote conservation easements as a way to shelter income from tax liability. This syndicated form, created and packaged by middlemen known as “promoters,” involves buying up land, finding an appraiser willing to declare that it has huge development value and thus is worth many times the purchase price, then selling stakes in the deal to wealthy investors who extract tax deductions that are often many times more times than the amount invested.

In March 2019, the IRS added a Conservation easement scheme to its annual list of “the worst of the worst tax scams.” That same type of scheme was targeted – just weeks earlier – when the U.S. Department of Justice filed a fraud lawsuit against the promoters allegedly responsible for generating more than $2 billion in improper tax write-offs. And the Senate Finance Committee has been investigating that very same achemes, recently demanding thousands of pages of documents from six promoters. Lawmakers from both parties have introduced legislation to halt the same practice.

Late in 2019 the IRS announced that there will be increased enforcement actions against Syndicated Conservation Easements. Go here.

The concern for CPAs is that the IRS are considering certain syndicated conservation easement transactions as abusive tax shelters and will disallow the deduction. To quote IRS Commissioner Chuck Rettig.

“Abusive syndicated conservation easement transactions undermine the public’s trust in private land conservation and defraud the government of revenue. Putting an end to these abusive schemes is a high priority for the IRS.”

So why is this professional liability exposure for accountants and tax preparers?

Accountants run the risk of professional liability claims from a variety of activities (ranked by degree of potential risk):

  1. as an agent or marketer for a promoter of a Syndicated Conservation Easement;
  2. as part of the recommended product in a portfolio of investments of a wealth management client;
  3. as a referral source to a Syndicated Conservation Easement promoter;
  4. as an aggressive deduction in the tax returns of a high net worth individual (a deduction 3 to 8 times the original cost of the investment; and,
  5. as a conservative deduction in the tax returns of a high net worth individual (a deduction 1 to 3 times the original cost of the investment.

Each risk exposure brings with it unique challenges and depending upon the degree of risk, amd we recommend that a CPA firm should plan to take steps to mitigate the possibility of a claim arising from abusive syndicated conservation easement transactions.

For example, no firm should ever act as a promoter or marketer of these products. This will tie a firm directly to the syndicator and create a significant risk if the product is deemed by the IRS as abusive syndicated conservation easement transactions.

If a firm has recommended, or plans to recommend, a syndicated conservation easement to your client the CPA must have undertaken a thorough analysis and due diligence of the product on behalf of the investor/client. All investment should be subject to a test of reasonableness as to deductibility (a deduction of 4-8 times the value of the investment easily fails this test). If you are still going to recommend a this type of investment it may also be prudent to suggest a variety of product options from which your client can choose, in the same way you would refer a client to a service provide, Do not “pick” an investment.

If you have referred any client to syndicators of conservation easement in the past you should review your files. Any clients so identified should be reviewed (for the test of reasonableness as described above) and if they fail should be considered professional liability potential claims. You may also notify your professional liability insurer to see what loss mitigation steps the insurer recommends.

If the CPA merely prepared tax returns and the client undertook their own research the risk factor is lower, but a CPA should still review their files to establish which clients took a deduction for a syndicated conservation easement. Depending upon the tax position (aggressive vs. conservative) you or your client should be prepared to seek advice of qualified tax counsel and secure a tax opinion letter.

Contingent upon the reasonable test suggested above, you should consider contacting any client that has invested in a syndicated conservation easement. If the deduction taken by the client is conservative (less than 2 ½ times the cost) then there may be nothing more to do other than to advise the client of the IRS investigation and offer assistance in the event of an audit. If the deduction taken is aggressive (up to 8 times) then you may want to offer to refile the tax returns for the years where such aggressive deductions were taken. The IRS will usually look more favorably on a volunteer disclosure and refiling, than is an aggressive deductibility position is revealed in an audit. By early detection and disclosure you may be able to avoid the imposition of penalties and interest.

Regardless it would be prudent to get in front of this potential problem.  Consider issuing a letter to tax clients advising this potential problem and offer to meet (or web meet) to discuss what can be done to mitigate the possibility of a problem with the IRS.

Finally, an accountant may be exposure to a Preparer Penalty due to unreasonable positions under Title 26 of the Tax Code which states:

IRC § 6694(a) – Understatement due to unreasonable positions. The penalty is the greater of $1,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.


IRC § 6694(b) – Understatement due to willful or reckless conduct. The penalty is the greater of $5,000 or 75% of the income derived by the tax return preparer with respect to the return or claim for refund.

The imposition of these fines could be very expensive if your practice has many tax clients that have taken aggressive deductibility position for a syndicated conservation easement.

In conclusion to quote the Latin expression: “praemonitus, praemunitus” – which loosely translates as “forewarned is forearmed’ – all accountants and tax prepares must get ahead of this impending risk exposure by:

  • discovering which clients it impacts; • determining the best course of action and discussing this with clients; and,
  • taking appropriate proactive steps to minimize the potential for penalties and interests.

Accounting firms may also way to coordinate with their professional liability insurance company, insurance agent or risk management consultant.


Jorgensen & Company are not attorneys and do not offer any form of legal advice. Consult with appropriately qualified local counsel for more assistance. Rickard Jorgensen is President and Chief Underwriting Officer for the CPAGold™ program and may be contacted at (201) 345 2440 or rjorgensen@jorgensenandcompany.com.  Ralph Picardi, Esq. is an attorney at Picardi, LLP and may b e contacted at (866) 668 7475.


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