Conservation Easement Fraud: Whistleblower’s Guide to Reporting

It always starts with a “promotor” referring someone to invest in a land scheme. The promotor will promise that the investor can write off the over-inflated value of the “donated” land as a tax deduction. Below is a general breakdown of how this scheme works:

• Creating investment vehicles:Promoters often set up partnerships or LLCs (limited liability companies) to pool investor funds for purchasing land.

• Inflating land value: They arrange for appraisals that significantly overestimate the land’s worth, creating a bigger “donation” amount for tax purposes.
• Luring investors: Promoters entice potential investors with the prospect of claiming tax deductions that far exceed their actual investment.They might guarantee a specific ratio, like a 4 to 1 return on their investment (meaning a $100,000 investment translates to a $400,000 tax deduction).
• High fees: These schemes often involve hefty fees for the promoters, regardless of whether the inflated deductions hold up under IRS scrutiny.

Essentially, promoters are orchestrating and profiting from a system that exploits the conservation easement tax benefit for personal gain. However, given the advancement in data analysis, machine learning, and whistleblowers legislation, promotors are getting caught more and more.

Some common tactics the IRS may use to locate such schemes might include evaluating land appraisals, looking at the ratio of tax deductions to investment, charity qualifications, as well as scrutiny of partnerships and data analytics.

However, whistleblowers incentivized with rewards and protection, and who have firsthand knowledge of a conservation easement scheme, are generally the ones who end up exposing these fraudsters. Whistleblowers are critical to the integrity of the U.S. tax system.

If you or someone you know is in a conservation easement arrangement, or evaluating whether they’d like to invest in one, there are some clear red flags to be on the lookout for, which might indicate whether they are abusive:

• Outlandish Tax Deductions: If the person promoting the investment is guaranteeing a specific ratio of tax deduction to your investment (like a 4:1 return, meaning a $100,000 investment translates to a $400,000 tax break), that’s a huge red flag. Actual deductions are based on the fair market value of the easement, not inflated numbers.
• Questionable Appraisals: Be cautious if the appraisal for the land seems out of line with its true value. Appraisals arranged by the person promoting the easement might be inflated to make the easement donation seem more valuable for tax purposes.
• Unqualified Charities: The conservation easement should be donated to a qualified charitable organization with the expertise to manage and uphold the easement’s restrictions. If the charity seems unfamiliar or lacks experience, it raises concerns.
• High Fees: Legitimate conservation easement transactions involve some fees, but if the promoter demands high upfront fees or a large percentage of the supposed tax benefits, that’s a bad sign.
• Pressure and Rush Tactics: a hallmark of all fraudsters! If the promoter pushes you to invest quickly or discourages you from seeking independent advice, it’s a red flag. Legitimate transactions allow time for careful consideration and independent review.

Like with all investment frauds, investors, and taxpayers alike, must evaluate the sales pitch. As the old saying goes “if it’s too good to be true, then it probably is.” It’s advised that you speak with an independent (3^rd party) tax professional or attorney to get their guidance.

Difference Between a Syndicated Conservation Easement (SCE) and a Standard Conservation Easement

A syndicated conservation easement differs significantly from a standard conservation easement.

While both involve landowners giving up development rights to protect land, syndicated conservation easements are often used as investment vehicles where promoters market pre-packaged easements to investors for potential tax deductions. 

Standard conservation easements are typically used for direct conservation goals, like protecting open space or historic properties, with the landowner receiving a tax deduction for donating the easement. 

Those involved in abusive conservation easement schemes can be punished with tax liabilities, fines, or even criminal charges. Whistleblowers who report schemes where the total tax evaded in a scheme exceeds $2 million may become eligible for a reward between 15% and 30% of the monies collected in a successful case in which the IRS pursues. Below are some other factors:

• Specific and credible evidence: whistleblowers need to provide concrete information that supports their claim of fraud. This could include documents, emails, recordings, or firsthand knowledge of the scheme’s inner workings.
• Original source: The information you provide should be original and not readily available to the public through news reports, court documents, or other public sources.
• Significance of information: The information you report must be deemed significant by the IRS in helping them investigate and potentially recover taxes, penalties, and interest.
• No prior knowledge of wrongdoing: You generally cannot claim a reward if you were directly involved in planning or carrying out the fraudulent scheme.
• Pre-existing investigations: You may still be eligible for a reward if you report during an ongoing investigation, if your information is original and contributes meaningfully to the case.
• Proper filing: You need to submit your report using the appropriate IRS form, typically Form 211, Application for Award for Original Information.

The IRS keeps whistleblower identities confidential throughout the process. Anonymous whistleblowing is permitted, but only using an attorney. If a whistleblower is seeking a reward, they must have a claim that is specific, credible, and supported information. Protections are available for those employees who report such schemes.

For more concrete understanding of the IRS whistleblower program, eligibility requirements, and filing process, we suggest you read our guide: Reporting Someone to the IRS: A Whistleblowers Guide – by understanding your rights as a whistleblower, you can increase the chances of receiving a reward.

Not all conservation easements are illegal! It’s important to note that the original purpose of a conservation easement is to protect our natural land.

When land is protected, it serves as a habitat for wildlife, forests, wetlands, and other ecosystems. These arrangements can also go as far as to protect endangered species! Amazing, right?

These easements can also protect working farms and ranches from being subdivided or developed on, helping maintain their original “natural” state.

And lastly, as we’ve been discussing, donating land can allow a landowner to claim a charitable deduction on their taxes – but this value is based on the fair market value (not inflated value!). This is great for any landowner looking to pass on the land to future generations.