On May 13, 2026, the IRS announced (IR‑2026‑65) a new 90-day time-limited settlement opportunity for certain taxpayers involved in conservation easement disputes, an area that has generated extensive litigation over the past decade. Courts have consistently sided with the government, often allowing only a small fraction of claimed deductions and imposing steep penalties (40% gross valuation misstatement penalty). Currently, reports are that there are approximately 740 conservation easement cases tied up in Tax Court and approximately 400 more under examination.

The settlement opportunity is not available for every conservation easement case. More specifically, the settlement opportunity is not available in cases that (1) have been tried or are awaiting an opinion, (2) are on appeal to one of the US Circuit Courts of Appeal, (3) have already settled, (4) have agreed to be bound by another case (the “test case”), if the test case has been tried and is awaiting final decision, (5) have a trial that is set to commence within 30 days of this announcement (which was May 13, 2026), or (6) are designated test cases, unless all bound cases have settled or agree to settle under this initiative.

In the case of a partnership that is eligible for the settlement opportunity, the partnership will receive individualized correspondence setting forth the settlement terms for the partnership. Among other terms listed in IR-2026-65, the settlement terms will include a reduced gross valuation misstatement penalty of 10% (increasing to 20% if the partnership settles after the initial 90-day period but within the following 45-days), no charitable deduction will be allowed and the partnership will not be required to make payment at the time it elects into the initiative.

After settlement is reached, for partnerships governed by TEFRA, the IRS will issue notices specifying the amount owed by each individual partner. For partnerships subject to the Bipartisan Budget Act (BBA) that did not elect to push out the settlement liability, the partnership is responsible for payment; if it cannot pay, the IRS will send notices to partners of the partnership (presumably partners of the partnership for the taxable year in which the settlement was entered into) detailing their respective liabilities arising from the settlement adjustments. If the partnership elected to push out the settlement liability, it must provide statements to both the IRS and its partners from the reviewed-year outlining the adjustments and the amounts allocated to each reviewed-year partner. In that case, reviewed-year partners are responsible for reporting and paying their share of those adjustments, which may result in significant tax and require proactive planning.

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