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In a highly anticipated and long awaited decision, on April 21 the U.S. Court of Appeals for the Tenth Circuit ruled in favor of the IRS in Liberty Global Inc. v. U.S. The court held that Liberty Global's disputed transactions lacked economic substance and that the economic substance doctrine did not require a threshold relevancy determination to be applied.

Setting the stage: why Liberty Global matters

For years, the codified economic substance doctrine in section 7701(o) sat atop an already muddled common‑law landscape, with courts disagreeing on when the doctrine is “relevant” and how intrusive it should be in evaluating tax‑motivated planning. Congress tried to clarify, not replace, existing doctrine in 2010, expressly limiting section 7701(o) to “any transaction to which the economic substance doctrine is relevant,” but never defining what “relevant” means. Initially, the IRS imposed internal executive‑level approval requirements before agents could assert economic substance and the strict‑liability penalties under sections 6662(b)(6) and 6662(i), but those approvals were lifted in 2022 following TIGTA criticism that the Service was under‑using the doctrine in large corporate and partnership cases. Since then, exam teams have invoked economic substance with increasing frequency, often against complex corporate restructurings and cross‑border plans that formally comply with Code mechanics but generate eye‑catching tax benefits.

The Liberty Global transaction and holding

Liberty Global’s “Project Soy” was a four‑step cross‑border restructuring designed to exploit a timing mismatch among the GILTI, Subpart F, and section 245A regimes to transform approximately 2.4 billion dollars of gain into a dividends‑received deduction. In the district court, Liberty Global conceded that the first three steps of the plan failed the two‑prong economic substance test—no meaningful non‑tax economic change and no substantial non‑tax purpose—leaving on appeal only whether section 7701(o) was even “relevant” to Project Soy. A divided Tenth Circuit affirmed the District of Colorado, holding that the codified economic substance doctrine applies even when the taxpayer has mechanically followed the literal terms of the Code, so long as the resulting tax benefit is not one Congress can reasonably be thought to have intended. The majority further rejected the argument that common M&A elements or ordinary business steps are categorically immune from economic substance review, emphasizing that section 7701(o)(5)(D) permits courts to analyze an integrated series of steps as a single transaction even when individual pieces resemble routine business moves.

U.S. Circuit Judge Allison Eid dissented, reading section 7701(o)’s “relevant” language as demanding a threshold inquiry before courts can apply the doctrine, and warning that skipping this step invites economic substance into ordinary‑course transactions Congress did not mean to police in this way. Her dissent provides a roadmap for further litigation, including a possible en banc request in the Tenth Circuit or a future certiorari petition that squarely asks the Supreme Court to define “relevant” for purposes of section 7701(o).

How Liberty Global fits with Patel and Perrigo

Recent cases underscore that Liberty Global is part of an emerging split on the scope of the doctrine and the role of the relevancy requirement.

·         In Patel v. Commissioner, a reviewed 2025 Tax Court decision involving microcaptive insurance arrangements, the court held that Congress “could hardly have been clearer” that the economic substance doctrine is only relevant to certain transactions. After expressly conducting a relevancy inquiry under section 7701(o), the Tax Court concluded the microcaptive structure lacked both meaningful non‑tax economic change and substantial non‑tax purpose, disallowing the deductions and sustaining 20% and 40% strict‑liability penalties. Patel is now on appeal to the Fifth Circuit, which will have an opportunity to endorse or refine the Tax Court’s articulation of the relevancy requirement.

·         In Perrigo Co. v. United States, the Western District of Michigan rejected the government’s attempt to invoke common‑law economic substance and related sham doctrines to disregard an intercompany assignment of contract rights to a controlled Israeli affiliate. The court found the restructuring had genuine business drivers and declined to treat economic substance as a catch‑all anti‑abuse tool where section 482 and other specific provisions already provided a tailored framework. Although Perrigo addressed the uncodified doctrine rather than section 7701(o), it signals judicial skepticism toward using economic substance to override transactions that fit cleanly within detailed statutory and regulatory regimes.

Taken together, Patel and Perrigo stand in tension with the Tenth Circuit’s willingness in Liberty Global to treat “relevance” as essentially satisfied whenever a taxpayer uses Code mechanics to achieve a result courts view as inconsistent with congressional intent. That divergence increases the odds that the appellate courts—and eventually the Supreme Court—will be asked to draw clearer lines around when economic substance can and cannot be deployed.

Different judicial approaches at a glance

Implications for planning, exams, and penalties

The Liberty Global majority opinion is likely to embolden the IRS to assert economic substance more aggressively in cases where taxpayers have exploited timing, hybrid entities, or structural asymmetries in the Code to achieve large deductions or deferrals. Tax advisors can expect exam teams to cite Liberty Global when challenging cross‑border restructurings that are technically compliant but difficult to square with a principled reading of congressional intent, especially in the GILTI, Subpart F, section 245A, and related international regimes. Because section 7701(o) carries strict‑liability penalties—40 percent for undisclosed transactions and 20 percent with adequate disclosure—the risk calculus around “mechanical” planning has shifted further in the government’s favor, particularly in the Tenth Circuit and in cases likely to influence national guidance.

At the same time, Perrigo offers a counter‑narrative for taxpayers arguing that economic substance should not be used as a blunt instrument where more precise tools like section 482 already exist and where transactions have clear commercial rationales. Patel demonstrates that courts are capable of conducting a disciplined relevancy analysis and still reaching a government‑favorable result, which could appeal to appellate judges concerned about unchecked judicial anti‑abuse doctrines. If the Fifth and Sixth Circuits embrace Patel’s and Perrigo’s more bounded views, the split with the Tenth Circuit’s Liberty Global framework will become sharper and potentially ripe for Supreme Court review.

Practical takeaways for taxpayers and advisors

From a practical standpoint, Liberty Global reinforces that taxpayers cannot safely rely on formal compliance with Code text alone when the economic outcome appears tax‑driven and disconnected from business realities. To mitigate audit and litigation risk:

·         Elevate business purpose: Ensure that every major step in a transaction can be tied to a concrete business objective—operational efficiency, market access, regulatory requirements, financing needs—supported by contemporaneous evidence. Advisors should help clients articulate these rationales in clear, non‑tax‑centric terms.

·         Build a cohesive documentary record: Maintain a consistent story across board materials, internal slide decks, tax memos, external opinions, emails, and press releases; inconsistencies or “tax‑only” project names create fertile ground for an economic substance challenge. Contemporaneously document alternative structures considered, why they were rejected, and how the chosen path better addressed the underlying business problem.

·         Preserve key transaction artifacts: Keep detailed reorganization plans, financial projections pre‑ and post‑transaction, valuation reports, legal opinions, and operational integration documents readily accessible for a future exam. Identifying a clear business “owner” for each transaction—someone who can credibly explain commercial motivations—is often as important as the written record.

·         Rethink penalty posture and disclosures: Given the strict‑liability penalties and the Tenth Circuit’s expansive reading of “relevance,” taxpayers should carefully evaluate whether protective disclosures are warranted for significant tax‑motivated restructurings, especially those involving legislative gaps or timing mismatches. Opinions should analyze not just literal statutory compliance but also how a court might view economic substance in light of Liberty Global, Patel, and Perrigo.

Liberty Global is unlikely to be the last word on economic substance, but it meaningfully re‑weights the balance between taxpayer reliance on statute text and judicial anti‑abuse authority. 

Need Advice on Tax Restructuring?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources:

1.       https://www.pwc.com/us/en/services/tax/library/us-court-of-appeals-rules-against-liberty-global.html        

2.      https://www.ntu.org/foundation/detail/tenth-circuit-liberty-global-decision-unfortunately-supports-broad-interpretation-of-economic-substance-doctrine       

3.      https://www.davispolk.com/insights/client-update/divided-10th-circuit-affirms-district-court-economic-substance-doctrine      

4.      https://www.cov.com/en/news-and-insights/insights/2026/04/tenth-circuit-grants-us-win-on-economic-substance-in-closely-watched-liberty-global-tax-case         

5.       https://www.thetaxadviser.com/issues/2026/feb/penalties-under-codified-economic-substance-doctrine-upheld/      

6.      https://www.ca10.uscourts.gov/sites/ca10/files/opinions/010111286948.pdf

7.       https://www.law360.com/articles/2468310/liberty-global-loses-2-4b-tax-substance-fight-in-10th-circ 

8.      https://www.currentfederaltaxdevelopments.com/blog/2025/11/12/examining-penalties-in-microcaptive-transactions-patel-v-commissioner   

9.      https://www.captive.com/news/tax-court-addresses-economic-substance-and-disclosure-penalties-in-micro-captive-case   

10.   https://insightplus.bakermckenzie.com/bm/dispute-resolution/united-states-district-court-upholds-economic-substance-of-intercompany-transactions-in-perrigo       

11.    https://www.millerchevalier.com/publication/perrigo-opinion-upholds-economic-substance-intercompany-assignment-contract-rights    

12.   https://taxnews.ey.com/news/2026-0397-district-court-judge-approves-final-judgment-in-case-on-economic-substance-doctrine  

13.   https://www.hklaw.com/en/insights/publications/2024/05/beware-liberty-global-appeal-puts-basic-tax-planning-in-jeopardy

14.   https://www.currentfederaltaxdevelopments.com/blog/2026/4/21/the-tenth-circuit-codifies-the-reach-of-the-economic-substance-doctrine-over-mechanical-statutory-compliance

15.    https://captivereview.com/news/tax-court-upholds-penalties-in-patel-micro-captive-case/

Read more at: Tax Times blog

Payroll tax evasion is quietly becoming one of the riskiest “shortcuts” a business can take, and recent cases show that the government is responding with longer prison sentences and bigger crackdowns, especially in construction and other labor‑intensive industries.

What Payroll Taxes Are – And Why They Matter

When you get a paycheck, your employer withholds money for income tax, Social Security, and Medicare, and then sends those funds to the IRS on your behalf. The employer also pays its own share of Social Security and Medicare taxes on top of what is taken from employees’ checks.

These withheld amounts are called “trust fund” taxes because the employer is holding them in trust for the government and for workers’ future benefits. They are a major source of funding for Social Security, Medicare, and a large chunk of overall federal income tax collections.

How Payroll Tax Evasion Works

Payroll tax evasion happens when a business withholds taxes from paychecks but never sends them in, or simply never withholds what it should in the first place. Sometimes owners do this to prop up a struggling business for “just a few months,” and other times they do it to fund a more lavish lifestyle.

Common schemes include:

·         Paying workers in cash “off the books”

·         Treating clear employees as “independent contractors” to dodge withholding

·         Running wages through shell companies or check‑cashing services

·         Withholding taxes from paychecks but using the money as a personal or business slush fund

In construction, authorities say they are seeing large networks of shell companies and fraudulent documents used to avoid payroll taxes and workers’ compensation premiums, costing governments hundreds of millions of dollars a year.

Real People, Real Prison Time

Recent prosecutions show what can happen when payroll taxes are treated like extra cash instead of a legal obligation. One Dallas staffing‑company owner failed to send more than $3 million of withheld payroll taxes to the IRS and instead used the money for international travel, luxury goods, and a $10,000‑a‑month home. After a jury trial, she was sentenced to more than eight years in prison and ordered to pay hundreds of thousands of dollars in restitution.

In another case, a former Virginia business owner withheld employment taxes over many quarters but didn’t file returns or pay the IRS, causing about $3.1 million in tax loss and earning a sentence of more than six years in prison. The Justice Department emphasizes that timely payment of these taxes is “critical to the functioning of the U.S. government” and that they will “fully pursue” these offenses to protect tax dollars.

These are not isolated stories; commentators and watchdogs have noted that the number and size of payroll tax violations are increasing, and that traditional civil penalties alone are not enough to stop the trend.

Why Enforcement Is Ramping Up

Several developments are driving tougher enforcement around payroll taxes:

·         Focus on high‑risk areas: IRS Criminal Investigation and the Justice Department’s Tax Division list employment tax fraud as a major priority, because every unpaid dollar multiplies quickly through interest, penalties, and harm to federal programs.

·         Construction crackdowns: FinCEN and IRS investigators recently issued a joint notice warning of a “concerning increase” in payroll tax evasion and workers’ comp fraud in residential and commercial construction, especially involving shell companies and check‑cashing operations.

·         Better data tools: Authorities are increasingly using bank‑report data and analytics to spot suspicious patterns, such as large cash withdrawals and complex flows through multiple business accounts that suggest hidden payrolls.

Regulators have even highlighted how Bank Secrecy Act reporting by banks can help expose payroll tax and insurance fraud schemes, making it harder to hide these activities in the shadows.

What Business Owners Should Take Away

For honest business owners, the message is simple: payroll taxes are never optional, even in a cash crunch. The government treats them as money that belongs to employees and the public, not to the company, which is why violations often trigger both steep civil penalties and criminal charges.

If a business falls behind, the safest move is to get professional help quickly, work with the IRS, and avoid making matters worse by trying to “borrow” from payroll tax funds. Recent cases show that once prosecutors believe an owner knowingly crossed the line and ignored warnings, prison time and large restitution orders are very much on the table.

If you were reading this as a potential client or business owner, would you find it more helpful to see a short checklist of “do’s and don’ts” to stay out of payroll‑tax trouble?

 Have Payroll Tax Problems?

 Contact the Tax Lawyers at
Marini & Associates, P.A. 

for a FREE Tax HELP Contact Us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888-8TaxAid (888-882-9243) 

Sources:

1.       https://www.law360.com/articles/2474463/fla-couple-sentenced-for-evading-37m-in-payroll-taxes    

2.      https://www.law360.com/tax-authority/federal/articles/2474463/fla-couple-sentenced-for-evading-37m-in-payroll-taxes   

3.      https://www.law360.com/whitecollar/articles/2474463  

4.      https://www.justice.gov/usao-mdfl/pr/two-orlando-residents-sentenced-148-million-construction-payroll-scheme-defrauded-irs     

5.       https://www.flmd.uscourts.gov/locations/jacksonville 

6.      https://en.wikipedia.org/wiki/United_States_District_Court_for_the_Middle_District_of_Florida 

7.       https://www.flmd.uscourts.gov/divisions 

8.      https://www.pacermonitor.com/public/case/55991699/USA_v_Escobar_et_al 

9.      https://www.law360.com/tax-authority/cases/67191f30722b940501fe7b71/dockets 

10.   https://www.justia.com/us-states/florida/courts/middle/district_court/jacksonville-divisional-office/

11.    https://www.oyez.org/cases/2015/15-7

12.   https://supreme.justia.com/cases/federal/us/579/15-7/

13.   https://ballotpedia.org/Universal_Health_Services_v._U.S._ex_rel_Escobar

14.   https://www.whistleblowers.org/amicus-curiae-briefs/universal-health-services-v-u-s-ex-rel-escobar-supreme-court-victory-for-whistleblowers/

15.    https://en.wikipedia.org/wiki/Universal_Health_Services,_Inc._v._United_States_ex_rel._Escobar

16.   https://law.justia.com/cases/federal/district-courts/FSupp/600/88/2379557/

17.    https://www.thehealthlawpulse.com/2018/01/court-applies-escobar-overturns-350m-false-claims-act-verdict/

18.   https://www.law360.com/cases/5b60f0e8e944eb083d5a5e67

19.   https://www.klgates.com/US-Supreme-Court-Implied-Certification-Case-Both-Expands-and-Limits-False-Claims-Act-Liability-06-17-2016

20.  https://cases.justia.com/federal/district-courts/florida/flmdce/6:2021cv00694/389389/203/0.pdf

21.   https://www.fedbar.org/wp-content/uploads/2016/12/Escobar-pdf-1.pdf

22.   https://www.supremecourt.gov/DocketPDF/19/19A1058/146700/20200630232129590_6.30.20 Renewed Emergency Application with Appendix.pdf

23.   https://www.psc.state.fl.us/library/FILINGS/2025/15482-2025/15482-2025.pdf

24.  https://dockets.justia.com/docket/florida/flndce/4:2025cv00386/534188

25.   https://www.hollywoodfl.org/DocumentCenter/View/18457/Vacation-Rental-Listing-20210406

26.  https://case-law.vlex.com/vid/united-states-v-escobar-886268203

27.   https://cityclts.coj.net/coj/cojBillSearchNew.asp?D=1%2F16%2F2018

28.  https://www.thewbkfirm.com/industry/court-vacates-350-million-fca-jury-verdict-escobar

29.  https://grantcountynm.gov/DocumentCenter/View/2413/Resolution-R-26-14-2026-County-Maintained-Roads-Mileage-Certification

30.  https://www.fincen.gov/news/news-releases/fincen-notice-highlights-concerning-increase-payroll-tax-evasion-workers     

31.   https://www.forbes.com/sites/robertwood/2025/04/25/irs-payroll-tax-violations-can-draw-big-penalties-and-even-prison/      

32.   https://www.fedortax.com/blog/cautionary-tale-eight-years-prison-for-payroll-tax-fraud   

33.   https://www.irs.gov/compliance/criminal-investigation/dallas-business-owner-sentenced-to-more-than-eight-years-in-prison-for-failing-to-pay-over-withheld-employment-taxes    

34.   https://www.justice.gov/opa/pr/former-virginia-business-owner-sentenced-employment-tax-fraud    

35.   https://www.justice.gov/archives/tax/employment-tax-enforcement-0        

36.   https://www.irs.gov/statistics/irs-the-tax-gap

37.   https://www.symmetry.com/payroll-tax-insights/common-tax-evasion-schemes-the-irs-knows

38.  https://www.tigta.gov/sites/default/files/reports/2025-08/2025300031fr.pdf 

39.   https://www.atlantis-press.com/article/126014278.pdf

40.  https://www.linkedin.com/pulse/irs-enforcement-trends-compliance-updates-mcdaccg-elyac

41.   https://www.facebook.com/FOX7Austin/posts/a-houston-business-owner-and-former-cpa-has-been-sentenced-to-prison-for-failing/1454932330006351/

42.  https://www.facebook.com/DakotaNewsNow/posts/de-smet-man-and-woman-convicted-of-willful-failure-to-pay-payroll-taxes-to-irs️/1340021504822513/

43.   https://www.reddit.com/r/pettyrevenge/comments/1mbn7e3/terminated_without_warning_reported_them_for_tax/

Read more at: Tax Times blog

On May 6, 2026, the IRS released IR‑2026‑63 announcing significant updates to its Conservation Easement webpage and previewing a forthcoming, time‑limited settlement opportunity for taxpayers involved in abusive conservation easement transactions. The announcement reinforces the Service’s long‑standing view that promoter‑driven easement deals are abusive tax shelters and signals the next phase in its enforcement campaign against these transactions.

While the detailed settlement terms have not yet been published, the tone of the release and the revamped web guidance make clear that the IRS is positioning itself from a posture of strength after years of favorable court decisions.

What Did the IRS Announce?

The IRS has overhauled its online conservation easement guidance to make it more user‑friendly and more explicit about what it considers abusive. The updated site highlights:

·         Expanded discussion of abusive conservation easement transactions, with an emphasis on syndicated deals built around inflated appraisals.

·         Summaries of recent court decisions where the government prevailed, often with drastic reductions to claimed deductions and the imposition of substantial penalties.

·         “Warning signs” for investors, including red flags such as pre‑packaged fund structures, marketing materials touting multiple‑of‑investment deductions, and questionable appraisals.

Importantly, the IRS also announced that it will soon roll out a new, time‑limited settlement opportunity for “eligible taxpayers” involved in these transactions. The current release does not include the term sheet or specific financial parameters, but it confirms that the Service intends to send settlement offers to eligible partnerships to resolve their federal tax exposure with “certainty.”

Context: Years of Enforcement and Litigation

The latest announcement fits squarely into a broader enforcement arc that has played out over the last decade. The IRS has:

·         Designated certain syndicated conservation easement transactions as listed transactions and pursued them aggressively in examinations.

·         Litigated a large docket of cases in the Tax Court and other federal courts, winning key decisions on valuation, perpetuity requirements, and penalty issues.

·         Previously offered targeted settlement initiatives, including the 2020 time‑limited syndicated conservation easement settlement program for docketed cases, in an effort to reduce inventory while maintaining a strong deterrent message.

The updated web guidance is designed not just to inform taxpayers, but also to underscore that the courts have generally validated the IRS’s legal theories. The agency is now leveraging that litigation record as it prepares what may be the final, broad settlement opportunity for many remaining abusive easement cases.

What We Know – and Don’t Yet Know – About the Forthcoming Settlement

At this stage, the IRS has only provided a high‑level preview of the new settlement initiative. Based on the announcement:

·         The program will be time‑limited, with offers extended to “eligible partnerships.”

·         The stated goal is to resolve federal tax consequences “with certainty,” suggesting standardized terms rather than bespoke deals.

·         The offer will be targeted at abusive transactions, especially syndicated conservation easements that have already drawn IRS scrutiny.

What we do not yet know is critical for planning:

·         The percentage of deduction disallowance the IRS will require.

·         Whether the Service will insist on full concession of the charitable deduction, or offer partial allowance in limited circumstances.

·         How accuracy‑related penalties, promoter penalties, and other sanctions will be handled.

·         Whether acceptance will require partner‑level agreements, closing agreements, or other waivers, and what the timing and procedural steps will be.

Until the IRS publishes the term sheet or FAQs, advisers and taxpayers cannot reliably model the economics of participating versus continuing to litigate or contest proposed adjustments.

Practical Takeaways for Investors and Partnerships

For investors and partnerships involved in conservation easement transactions, especially syndicated deals, this announcement should not be ignored. There are several immediate steps to consider:

·         Take inventory of exposure
Partnerships and investors should identify all conservation easement transactions currently under examination, in Appeals, or in litigation. Syndicated deals and transactions previously flagged by the IRS should be considered high‑priority.

·         Revisit the strength of your case
With the IRS emphasizing its win record, it is important to take a hard look at the quality of the appraisal, the deed’s perpetuity provisions, the economic substance of the transaction, and potential penalty defenses. Some cases may be litigation candidates; others may be better suited for a standardized settlement.

·         Prepare to act quickly
Time‑limited settlement initiatives often come with short response deadlines. Having a preliminary economic model ready—comparing a potential settlement structure to worst‑case litigation outcomes—will allow you to make a timely, informed decision once the IRS publishes actual terms.

·         Be cautious about new “alternatives”
The IRS’s expanded “warning signs” section underscores its concern that promoters may re‑package abusive structures under new labels. Investors should approach any conservation‑themed tax product promising outsized deductions with extreme caution and seek independent advice before investing.

How Our Firm Can Help

Once the IRS releases the detailed terms of the new settlement initiative, affected taxpayers will need to make fast, high‑stakes decisions. We expect the program to involve trade‑offs between certainty, cost, and the likelihood of success in continued litigation.

Our firm can assist by:

·         Reviewing your existing conservation easement transactions and identifying which are likely to be targeted.

·         Evaluating the strengths and weaknesses of your position in light of recent court decisions and IRS guidance.

·         Modeling the financial impact of potential settlement versus continued dispute.

·         Guiding you through the procedural steps of responding to settlement offers, negotiating where appropriate, and coordinating with other partners and advisers.

If you are involved in a conservation easement transaction or have received IRS correspondence regarding such an investment, now is the time to get ahead of the forthcoming settlement opportunity—not after the clock starts running.

Have A Conservation Easement Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources:

   1.       https://www.irs.gov/newsroom/irs-updates-conservation-easement-site-settlement-opportunity-details-forthcoming        

2.      https://news.bloombergtax.com/daily-tax-report-state/irs-issues-news-release-expanding-abusive-conservation-easement-guidance-announces-settlement-opportunity    

3.      https://natlawreview.com/article/irs-signals-continued-enforcement-new-conservation-easement-settlement-offer    

4.      https://wiggamlaw.com/blog/irs-plans-conservation-easement-backlog/ 

5.       https://irssolution.com/blog/tax-court-cases-that-can-change-irs-enforcement-in-2026-syndicated-conservation-easements/

6.      https://content.govdelivery.com/accounts/USIRS/bulletins/2929b2a 

7.       https://www.irs.gov/newsroom/irs-offers-settlement-for-syndicated-conservation-easements-letters-being-mailed-to-certain-taxpayers-with-pending-litigation

8.      https://www.linkedin.com/posts/grantmillercpa_easing-the-easement-backlog-activity-7437205913708625920-O5yF

9.      https://landtrustalliance.org/resources/learn/explore/irs-final-regulation-to-implement-the-charitable-conservation-easement-program-integrity-act

10.   https://www.kingdomexploration.com/?page=faq&slug=conservation-easement-alternative-oil-gas-irs-crackdown-2026

11.    https://www.linkedin.com/posts/michaelstuhltrager_easing-the-easement-backlog-activity-7429523546701312000-Zfpc

12.   https://www.linkedin.com/posts/amyjongerius_easing-the-easement-backlog-activity-7429885186990850048-FIdC

13.   https://tradersunion.com/news/financial-news/show/2005344-irs-conservation-easement-guidance-update/

14.   https://news.bloomberglaw.com/daily-tax-report/irs-issues-news-release-expanding-abusive-conservation-easement-guidance-announces-settlement-opportunity

15.    https://www.law360.com/articles/2474472/irs-to-settle-more-syndicated-easement-disputes

Read more at: Tax Times blog

On May 1, 2026, the Treasury Inspector General for Tax Administration (TIGTA) released a report with a blunt message for the IRS: its current procedures are not sufficient to prevent backdated penalty approvals under section 6751(b). The report grows directly out of the Tax Court’s LakePoint Land II decision, where the Court found that a supervisor had bac
kdated a penalty lead sheet and that IRS Counsel misrepresented the timing to the Court, resulting in sanctions under section 6673(a)(2).

For practitioners handling exams and Tax Court cases, especially syndicated conservation easement (SCE) matters, this report is essentially a roadmap for both IRS vulnerabilities and best practices you should be ready to leverage.

The Focus: Section 6751(b) in SCE Cases

Section 6751(b) was enacted in 1998 as a safeguard to ensure supervisory oversight of many civil penalties and to prevent penalties from being used as a “bargaining chip” in audits. It generally requires written approval of the initial penalty determination by the immediate supervisor of the IRS employee proposing the penalty, with exceptions for certain automated and basic failure‑to‑file or pay penalties.

Following the LakePoint decision, the IRS and Chief Counsel launched a special review in August 2023 of 1,268 SCE cases—829 docketed and 439 nondocketed—to assess compliance with section 6751(b). SCE transactions were chosen because the IRS has labeled them abusive and has examined or litigated more than 1,200 of them, making them a natural stress test for penalty procedures.

What TIGTA Found: Backdating, Missing Approvals, and Documentation Gaps

TIGTA’s findings will sound familiar to anyone who has litigated 6751(b) issues, but now they are documented in an official oversight report.

·         In the 829 docketed cases, the IRS identified 13 cases that did not comply with section 6751(b) due to lack of valid supervisory approval, and TIGTA agreed with those determinations.

o    In 7 of the 13 cases, supervisors backdated penalty approvals; the IRS conceded more than $68 million in penalties as a result.

o    In the remaining 6 cases, alternative penalties were added after the initial supervisory approval, and the IRS conceded those unapproved alternatives.

·         In the 439 nondocketed cases, the IRS initially reported full compliance, but TIGTA found:

o    6 cases where neither TIGTA nor the IRS could verify timely supervisory approval because key documents, such as explanatory letters to taxpayers, were missing from the case file.

o    Other documentation problems, including multiple versions of penalty lead sheets with identical digital signatures, penalties listed in taxpayer correspondence without a corresponding approved lead sheet, and summary reports reflecting penalties that lacked documented supervisory approval.

TIGTA characterizes these problems as reflecting weak supervisory oversight and systemic documentation and internal control deficiencies in the penalty approval process. The practical risk is clear: if the IRS cannot prove timely approval, penalties may be conceded or struck, and taxpayers’ confidence in the fairness of the system can erode.

TIGTA also flagged five potential unauthorized disclosure issues under section 6103, including instances where correspondence included another taxpayer’s name or TIN. One was self‑reported, and the others were referred to IRS management.

Digital Signatures: A Double‑Edged Sword for IRS (and a Tool for You)

One of the more interesting parts of TIGTA’s report is the discussion of digital signatures and document properties.

Chief Counsel’s internal review discovered cases where penalty lead sheets had been modified after being digitally signed, as shown by electronic document properties, without a new digital signature being applied. That analysis helped drive the IRS’s decision to concede penalties in 6 of the 13 noncompliant docketed cases.

TIGTA emphasizes that:

·         IRS policy does not currently require secure digital signatures that lock the document against changes or force re‑signing after edits.

·         IRS Counsel is not required by the Chief Counsel Directives Manual (CCDM) to conduct electronic document analysis in every docketed case, and current guidance on that is informal.

Yet TIGTA explicitly notes that digital signatures, combined with review of electronic document properties, provide some of the best available evidence of authentic, timely supervisory approvals in litigation. For practitioners, that is both a warning and an opportunity: the existence of digital signatures and metadata cuts both ways, and TIGTA is encouraging the IRS to use them more systematically.

Why Did Backdating Happen? TIGTA’s Diagnosis

TIGTA ties the backdating and documentation problems to two main causes:

·         Employees failed to follow existing policies, procedures, and appropriate practices.

·         The IRS lacked clear, consistent guidance on:

o    When penalties must be approved,

o    How to document penalty changes, and

o    How to hold employees accountable, including an explicit prohibition on backdating.

The LB&I Division conducted disciplinary reviews for several employees in the 13 problem docketed cases, with outcomes ranging from non‑disciplinary counseling letters to written reprimands. TIGTA notes that, given the facts, other categories of misconduct in the IRS Penalty Guide could have supported more serious discipline, including suspensions or removal.

On timing, the report walks through the current legal landscape. Courts have split on when supervisory approval is required, some allowing approval up to assessment and others requiring earlier approval in the examination process. Treasury issued regulations in 2023 that, broadly speaking, permit supervisory approval as late as the notice of deficiency for pre‑assessment penalties and any time up to assessment for post‑assessment penalties. Internal procedures were updated to align with those regulations, including changes to IRM 20.1.1.2.3 in November 2025.

At the same time, TIGTA notes a December 2025 bill—the Fair and Accountable IRS Reviews Act—proposing to amend section 6751(b)(1) to require supervisory approval before any written communication proposing the penalty is provided to the taxpayer, consistent with the National Taxpayer Advocate’s position.

TIGTA’s Five Recommenations – and IRS’s Commitments

TIGTA made five recommendations, and IRS management agreed with all of them.

1.       Promote digital approvals
TIGTA recommends that the IRS promote the use of digital approvals for penalty approval documents to enhance record integrity, accountability, and evidentiary reliability. The IRS agreed and committed to continue promoting digital signatures and other secure electronic methods, tying this to broader communications on penalty procedures.

2.      Standardize penalty procedures and documentation
TIGTA urges the Chief Tax Compliance Officer to work with SB/SE and LB&I to review and revise penalty procedures to ensure consistency in obtaining and documenting supervisory approvals and verifying section 6751(b) compliance. The IRS responded that procedures have already been updated to align with section 6751(b) and Treas. Reg. § 301.6751(b)-1, including revisions to IRM 20.1.1.2.3 (November 25, 2025), and that enhanced review procedures are in place.

3.      Formal 6751(b) checks in all docketed cases
TIGTA recommends adding explicit CCDM procedures requiring Counsel attorneys to verify section 6751(b) compliance in all docketed cases, which may include reviewing electronic document properties and corroborating materials such as activity records and emails. Chief Counsel agreed to update the CCDM accordingly.

4.      Explicitly prohibit backdating and clarify update procedures
TIGTA recommends that SB/SE and LB&I Commissioners:

o    Communicate clearly that backdating penalty approvals is not appropriate.

o    Require penalty approval documents to be dated contemporaneously.

o    Remind employees when supervisory approval is required.

o    Provide guidance on how to update signed documents when changes are needed.

5.       The IRS agreed, stating it will issue a memo advising that penalty approval documents must be contemporaneously dated, that backdating is not appropriate, clarifying timing requirements, and explaining how to properly update signed documents, with an emphasis on securing electronic approval as a best practice.

6.      Operational reviews after sanctions
Finally, TIGTA points out that the IRS did not conduct an operational review after LakePoint, even though the court imposed sanctions for inaccurate statements and a false declaration, while a contemporaneous SCE case (Everest Granite) did trigger an operational review when sanctions were threatened. TIGTA recommends updating the CCDM to require a review whenever a court imposes sanctions against Chief Counsel. Chief Counsel agreed to make that change.

Practical Takeaways for Taxpayers and Practitioners

The TIGTA report has immediate practical implications, particularly in SCE and other penalty‑heavy cases:

·         6751(b) remains a potent defense. TIGTA confirms that even in a focused review the IRS found multiple noncompliant cases and conceded tens of millions of dollars in penalties, largely because of backdating and poor documentation. Practitioners should continue to scrutinize penalty approval timing and documentation in every penalty case.

·         Ask for digital versions and metadata. TIGTA’s emphasis on digital signatures and document properties should encourage defense counsel to seek native electronic versions of penalty approval documents in discovery or informal exchanges, not just PDFs, and to consider their own metadata reviews.

·         Expect evolving IRS procedures. With IRM and CCDM updates underway and a potential legislative change on the horizon, the “when” and “how” of supervisory approval will likely become more formalized and perhaps earlier in the exam timeline. Staying current with IRM 20.1 and related CCDM provisions will be essential.

·         Document your own record. When you receive a proposed adjustment or penalty, preserve the correspondence, envelopes, and any metadata you can. Those timestamps may matter if the IRS later produces an approval that appears to post‑date the communication.

·         SCE cases are the testing ground—but not the end. Although the review focused on SCE transactions, TIGTA’s recommendations and the IRS’s responses are not limited to that area. Expect stricter documentation and more formal 6751(b) checks across all operating divisions.

If you’re representing clients facing significant penalties, this report provides both an advocacy roadmap and a preview of how IRS processes may tighten in the coming years.

Have A Tax Penalty Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
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Read more at: Tax Times blog