The Internal Revenue Service (IRS) currently has over 1,000 conservation easement deduction cases. Many of these are proceeding to Tax Court. As a result, the IRS issued what it claims is the final offer for settlement.

In evaluating the options for settlement, taxpayers should consider the potential risks of proceeding to Tax Court. The IRS has specific strategies that have been successful. Advisors should recognize that these strategies apply to charitable deductions for conservation easements but will generally be used for other types of disputes over deductions for gifts of appreciated property.

1. Technical Errors – In early conservation easement cases, the IRS was able to persuade the Tax Court of technical errors in the documents. These technical errors, such as an improper provision for the perpetuity requirement, were sufficient to void the deductions. However, in later cases, the technical errors were deemed insufficient, and the primary issue was valuation.
2. Restrictions on Use – Some easement deeds include extensive restrictions or exclusions. If the restrictions or exclusions are sufficient to place the perpetuity requirement at risk, the court may deny the deductions. These restrictions were generally reservations and other provisions in the deeds that were deemed excessive. The land trust must have sufficient capability to protect the easement, as a restriction that blocks effective enforcement could negate the deduction.
3. Highest and Best Use – Many valuation issues are based on the question of the highest and best use. Appraisers may attempt to use a discounted cash flow analysis for a new use. The IRS has successfully attacked the use of discounted cash flow if the assumed highest and best use is questionable.
4. Comparable Sales – If there are acceptable similar properties, the Tax Court prefers to use comparable sales for valuation. The IRS has won several cases by showing that the comparable sales chosen by the taxpayer did not reflect the characteristics of the easement property.
5. Partnership Promises – The promoters involved in the transaction may have made significant promises to potential investors. The IRS has been quite successful at obtaining information from letters, emails and other publications in which a partnership made substantial promises. In many cases, the promises specified a tax deduction to investment ratio that was created prior to the existence of an appraisal.
6. Tax Result Insurance – Some partnerships have purchased insurance that is supposedly effective to produce the desired tax result. If the charitable deduction is denied, then the insurance payment will make the parties whole. However, it is uncertain at present whether tax result insurance payments have actually been made.
7. Gross Valuation Misstatement Penalty – This penalty is 40% of the federal income tax liability based on the reduced charitable tax deduction. There is no reasonable cause defense for the gross valuation misstatement penalty. Because the valuations in Tax Court cases have often been significantly above the actual value, the 40% penalty applies. The IRS has made an offer to settle the conservation easement cases and reduce the 40% penalty to a 10% penalty. While the charitable deduction is denied, at least the penalty is less harsh.

Editor’s Note: Tax Court cases may take several years to litigate. The decision to settle is painful for both partnerships and investors. Many investors simply want to come to a settlement with the IRS and move on with life. However, the cost of a 40% penalty is quite daunting.

IRS Attacks Elder Fraud

The Internal Revenue Service Criminal Investigation (IRS-CI) division is responsible for protecting senior taxpayers from fraud schemes.  On World Elder Abuse Awareness Day held on June 15, IRS CEO Frank Bisignano explained that the IRS is making substantial efforts to protect senior taxpayers.

IRS Criminal Investigation Chief Jarod Koopman stated, "Criminals who target elderly Americans often think they can hide behind fake names, fake stories, and complex financial trails, but that is exactly where IRS-CI is strongest."

Koopman continued by explaining that the IRS understands the importance of protecting seniors. Koopman stated, “We know how devastating these crimes can be, and no one should ever feel ashamed for being targeted."

The IRS has seen an increase in fraudsters targeting seniors. This past year, the IRS-CI started 97 new elder fraud investigations. During the past five years, the IRS-CI conducted 255 elder fraud investigations and reviewed $736 million in alleged fraud. The IRS regularly prosecutes elder fraud cases and reported that 97% of the prosecutions resulted in a federal prison sentence that averaged four years.

There are several specific schemes or methods that are used by criminals to target seniors.

1. Impersonating the Government –A scammer will claim to be from the IRS or another government agency and threaten you with immediate arrest.
2. Emergencies – The fraudster claims a child, grandchild or other relative is in great danger. If you do not send money immediately, they could be seriously injured or even lose their life.
3. Romance Scams – Many criminals have great skills in building online relationships. They create a romantic relationship with the individual. These romance relationships frequently include pictures of attractive individuals and will eventually result in efforts to solicit funds from the victim.
4. Lottery Fraud – The targets are told that there is a multimillion-dollar lottery that they have just won. To receive the prize, they must make a payment in cryptocurrency to cover various fees.
5. Investment Fraud – The fraudster will promise a high-return and low-risk investment opportunity that is certain to produce an excellent return. These scammers often use Ponzi schemes or cryptocurrency strategies.
6. Charity Scams – The scammer creates a fake nonprofit with a name similar to that of a legitimate charity. These scams are usually created following a major disaster or tragedy. The scammer attempts to reach a vulnerable senior who has empathy for the disaster victims.

There are several red flags that should be warnings to potential victims. A scammer will demand immediate action. The payment will be through a gift card, wire transfer or cryptocurrency. You should take caution if you receive a phone call, email or text from an unknown person. If you answer the phone and are asked for personal or financial information, you should hang up. Many scammers also use threats of arrest or legal action to frighten you into immediate action.

You should know the steps to protect yourself. If someone claims to be from a government agency or bank and asks for a payment, hang up and contact the agency or bank directly. Do not take immediate action. Slow down and think through the situation. Visit with a trusted family member or financial advisor before any decision involving finances. You should regularly check your bank accounts, investment accounts and other accounts with online software.

If you have fallen victim to a scam, the first step is to recognize that many seniors have fallen victim to similar scams. These scammers are becoming increasingly sophisticated and many use artificial intelligence (AI) to increase the probability of a successful scam. You should stop any contact with the scammer. If there has been a transfer from your bank account, you should immediately notify the bank or other financial institution. You can call local law enforcement or an IRS-CI field office. Be sure to preserve all records, emails, screen shots or phone numbers.

Editor's Note: One of the best defenses against elder fraud is regular conversations with family members and advisors. They can help you by monitoring financial accounts and give you counsel about relationships with people online. As fraudsters become more skilled with AI, your risk will increase. It is important to take steps to protect yourself.

AI Litigation Limits

In an article by Kimberly Tyson, a former field attorney with the Internal Revenue Service (IRS) Office of Chief Counsel, there was an explanation of the current state of the law regarding the use of artificial intelligence (AI) in tax litigation.

In a recent case, a U.S. District Court faced a discovery dispute between the parties. The case is Conservation Law Foundation Inc. v. Shell Oil Co., No. 3:21-cv-00933 (D. Conn. May 18, 2026) (ECF 970). Plaintiff, Conservation Law Foundation, employed an expert witness who used AI to prepare materials. The defendant requested disclosure of the AI chat logs. The plaintiff claimed that Rule 26(b) and Rule 29 of the Federal Rules of Civil Procedure protected "expert notes, drafts, or other communications needed by, and made during, the report drafting process." The claim was that the AI chat logs were notes. However, the court decided that the Rule 29 protection only extended if the notes were "quite clear" and the AI chat logs were not covered by this exclusion. Therefore, the court ordered the plaintiff to produce "artificial intelligence prompts and/or queries used by the expert and her team in the course of producing the expert report."

The Tax Court Rules of Practice and Procedure include Rule 70 which limits the production of expert drafts. The principle is that draft expert reports and communications between the attorney and an expert should be protected from discovery. However, the opposing counsel can ask an expert witness about these communications at trial.

Tax Court Rule 143(g) generally requires disclosure of material considered by the expert. The committee explanation states, "The intention is that ‘facts or data’ be interpreted broadly to require disclosure of any material considered by the expert, from whatever source, that contains factual ingredients."

There is no Tax Court rule that specifically permits or prohibits the use of AI. The court generally does not tell the parties how to prepare the case. However, attorneys are responsible for "correct and accurate" documents.

In a conservation easement case, Riddle Aggregates LLC v. Commissioner, No. 31104-21 (T.C.), the taxpayer's attorney noted an IRS expert rebuttal report included AI hallucinations. After the mistakes were pointed out, Judge Kathleen Kerrigan noted she had "grave concerns." The attorneys were responsible for making certain that the information was correct. Using unverified AI was harmful to the credibility of the attorneys.

If AI is used by experts, there should be an effort to preserve the log of each AI chat. The AI chat logs are likely to be discoverable.

Editor's Note: Many attorneys are now using AI to review documents. This is a very common practice and a logical use of AI. However, the efforts to use AI to produce or review documents are inevitably going to lead to requests for production of AI chat logs.

Applicable Federal Rate of 5.2% for July: Rev. Rul. 2026-12; 2026-28 IRB 1 (15 June 2026)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2026. The AFR under Sec. 7520 for the month of July is 5.2%. The rates for June of 5.0% or May of 5.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2026, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”