The state of California is working with the Internal Revenue Service (IRS) to target taxpayers who are understood to have claimed large conservation easement or captive insurance deductions. This is because of concerns related to the abuse and misuse of these tax benefits. Both agencies are investigating schemes where taxpayers engaged in transactions that were viewed as “exploiting the tax code for financial gain”, as opposed to the intended purposes of promoting conservation or acquiring legitimate insurance coverage. To address potentially abusive micro-captive insurance and syndicated conservation easement transactions, the California Franchise Tax Board introduced Notice 2023-02 in May 2023. This notice allows eligible taxpayers to stop their involvement in these transactions, reverse their deductions and mitigate potential penalties by entering into a closing agreement.
