The IRS put out new guidance on Friday to stymie a well-worn tax evasion scheme that allows write-offs for land left undeveloped in order to promote environmental conservation.
Landowners can claim a credit for what they would have earned on their properties had they put them to industrial or commercial use, and such would-be developers have been claiming unjustified sums on these what-if scenarios.
Known as “syndicated conservation easements,” the scheme has been on the IRS’s ‘Dirty Dozen’ list of tax scams for years.
The abuse is so established, in fact, that it’s been shopped around by lawyers and accounting firms as a kind of business product in its own right.
“The regulations issued today will stem the tide of certain syndicated conservation easements that are nothing more than retail tax shelters, while protecting the integrity of legitimate conservation easements and helping law-abiding taxpayers more easily meet their obligations,” the IRS said Friday.
The IRS says it has observed tax scheme promoters take outsized deductions on these easements.
“We have seen taxpayers, often encouraged by promoters and armed with questionable appraisals, take inappropriately large deductions for easements,” the agency said in a recent statement.
The new IRS guidance pertains to a rule in a major piece of retirement legislation passed last year known as SECURE 2.0 that nixes the tax deductibility of “charitable contributions” worth more than two-and-a-half times what their investment in the property actually amounts to.
The rule pertains to companies classified as partnerships and S-corporations, which are now under the IRS’s microscope as engaging disproportionately in abusive tax avoidance.
“The IRS issued the conservation regulations to implement Congress’s 2022 limits on deductions for syndicated easements. [It’s] a good, bi-partisan initiative to offset some of the revenue loss to expand retirement benefits in SECURE 2.0,” tax expert Steve Rosenthal with the Urban-Brookings Tax Policy Center, a Washington think tank, told The Hill.
Despite the offset, SECURE 2.0 contained major perks for wealthy taxpayers that will add to the deficit outside of the 10-year budget window, in which the impact of laws on the national budget are required to be neutral. As such, tax experts have said the legislation includes an “accounting trick.”
One of the perks in the law for rich people was an increase in the age at which the government can start taxing retirement accounts. It was pushed back from 72 to 75, providing high-income earners an extra three years to defer tax payments and enjoy tax-free growth.
Most Americans living off their retirement savings begin to do so well before the age of 75.
“[This law] allows people to keep money in tax-preferred IRAs for longer. It allows you to wait to withdraw until you’re 75, and the people for whom that’s an benefit are the people who can afford to live on their non-retirement savings until they’re 75 to get more years of tax-free growth,” tax expert and New York University law professor Daniel Hemel told The Hill in an interview about the legislation in 2022.
The law also increased the maximum yearly amount allowed to be put into a retirement account to $71,000 from $67,500.
“That’s not a huge increase, but if you’re saving $67,500 in your 401(k), you’ve got to be pretty rich,” he said.