State revenue officials have tagged about 300 people for $12.2 million in back taxes stemming from conservation easements the government now says are flawed.
In a broadening investigation into easements — land donations that give property owners credit on future income-tax liabilities — the Colorado Department of Revenue has nullified tax breaks attached to 50 easements going back to 2000, when the program began.
Officials said they expect the number to grow.
In a related development, an additional 300 Colorado taxpayers learned they owe $2.4 million in back taxes for improperly using an easement deduction on their state returns, revenue spokesman Mark Couch said Monday.
That means roughly 600 Coloradans face $14.6 million in state tax liabilities from the easement program, Couch said.
Federal revenue officials have also been investigating the tax deductions generated by conservation easements. They recently declared a third of 290 cases under scrutiny to have faulty valuations, cheating the government of tax revenue. It is unclear how much tax money is at issue.
The federal probe prompted U.S. Sens. Wayne Allard, R-Colo., and Ken Salazar, D-Colo., on Friday to urge the IRS to hold offenders accountable but not sacrifice fairness for a speedy investigation.
“While we are encouraged that these investigations are a step closer to being resolved, a swift resolution must not come at the expense of fairness,” the senators wrote IRS Commissioner Linda Stiff.
The IRS has initiated settlement offers to conservation-easement donors whose property values were in question. The senators want the IRS to extend 30-day offers to settle by another 30 days.
The IRS is looking into easements nationally, but the bulk of the cases are in Colorado. Allard and Salazar, who sponsored legislation to extend easement deductions beyond this month’s expiration, are concerned that the inquiries might hurt the program.
“We want to ensure that this tradition of conservation is not undermined and that a cloud does not hang over the landowners in the conservation community in Colorado as a result of increased scrutiny from the IRS,” the senators jointly wrote Stiff.
Easement values are determined by a licensed appraiser. If the appraisals are not accurate or intentionally inflated, landowners can benefit unfairly.
“Whether it’s a dime or $100 million, if it’s a nefarious act, it’s wrong,” said John Vecchiarelli, Colorado’s senior director of taxation. “Inflating an appraisal or having a donation that’s a sham is another form of bad intent.”
There are about 1,500 conservation easements for 1.2 million acres of land in Colorado, totaling $270 million worth of tax breaks.
The state nullified tax credits on the 50 easements, Couch said, for reasons that included: The donation has no actual value because there is no development pressure on the land; an easement didn’t include prevention of future development; and the donation doesn’t meet conservation requirements under federal law.
Revenue officials don’t learn of an easement or its value until tax time, when the credits are taken on state returns and deductions on federal returns.
Credits are applied dollar-for-dollar to a state tax liability. So a landowner who owes $1,000 in taxes can pay it off with $1,000 in tax credits obtained from a conservation easement. Each easement is limited to a maximum of $375,000 in credits.
Federal taxes work differently. Easement values are taken as a charitable tax deduction, similar to monetary donations.
Landowners often don’t have enough state tax liability to use up the credits, so they sell them to someone else who can use them, typically for 80 cents on the dollar.
It’s these buyers who are being assessed for the $12.2 million in back taxes.
David Migoya: 303-954-1506 or dmigoya@denverpost.com
