The Internal Revenue Service has established a team dedicated to tracking down abusive tax breaks claimed through conservation easements.
The team is searching for patterns of abuse and for individuals who promote tax schemes related to land conservation, according to Steven T. Miller, the IRS commissioner for tax-exempt entities.
"We are going to shine a searchlight in their direction, and will use all civil and criminal tools at our disposal to combat abuses," Miller said in written testimony presented yesterday at a Senate Finance Committee hearing.
The hearing focused on a range of concerns. Many involved the Nature Conservancy, the world's largest environmental group and the subject of a two-year investigation by the committee's staff. Others centered on individuals and smaller charities that allegedly manipulate conservation laws to generate large tax deductions.
Much of the testimony related to conservation easements -- development restrictions added to land to help preserve habitat or open space. South Carolina Revenue Director Burnet R. Maybank III testified that he had identified more than $290 million in deductions claimed by taxpayers in his state over three years. Seven of the most lucrative tax deductions went to the owners of golf courses, who placed the easements on their fairways and claimed deductions totaling $125 million.
"The numbers we have seen are simply astonishing," Maybank said.
The IRS is requiring additional reporting on returns to identify which nonprofits hold conservation easements. Other forms filed by conservation groups will require them to identify individual easement donors and, in the case of large easements, send the IRS an appraisal that discloses the tract's value.
More than 20 easement-donation "promoters" are being examined by the IRS, Miller said, and five have been recommended for investigation.
Miller said the IRS is auditing more than 240 "high-dollar" easement donors and considering audits of an additional 100 donors. The IRS also is looking into a number of people who have donated facade easements -- deed restrictions designed to prevent changes to the exterior of older buildings -- and into a number of appraisers involved in such transactions. Auditors are examining seven charities that accept the easements and plan to begin audits of four more.
"What began as a laudable program to save open space, natural habitats and historic sites may have become distorted," he said. "We are committed . . . to stem abuse."
The Nature Conservancy, which has been under IRS audit since December 2003, was alternately praised and criticized at the hearing. Conservancy President Steven J. McCormick told the panel that, in the two years since his organization became the subject of an investigative series in The Washington Post, his organization has made an array of changes.
"We have conducted an extensive and rigorous internal review to strengthen our governance, increase accountability to our mission and make our actions more transparent to our donors and to the public," he said. "I can also tell you with confidence this morning that, today, we consistently meet higher standards of ethical conduct and organizational efficiency than we did two years ago."
An extensive investigative report released this week by the committee staff raised concerns about a range of practices at the Arlington-based charity. Some senators said the problems identified by the report appeared limited and praised the Conservancy for making changes.
"They have made real progress," said Sen. Charles E. Schumer (D-N.Y.). Sen. John D. Rockefeller IV (D-W.Va.) said the Conservancy "committed some errors . . . which have since been resolved."
Sen. Max Baucus (D-Mont.) praised the Conservancy's governance changes but said the staff investigation and other evidence showed "how lax procedures by land trusts . . . can give conservation efforts a bad name."
The committee chairman, Charles E. Grassley (R-Iowa), highlighted a previously undisclosed 2002 internal audit found in the Conservancy's files. The report looked into the Conservancy's nature preserve near Texas City, Tex., which contains the last native breeding ground of the Attwater's prairie chicken, one of the most endangered birds in North America. The Conservancy drilled for oil under the bird's nesting area.
In the report, the auditors described the Conservancy's attempt to buy another charity's oil and natural gas rights on the land through a third party as a "patently deceptive offer."
"Were the events that transpired at the Preserve to become public knowledge, the Conservancy's good reputation could be badly damaged," the audit concluded, eight months before an article on the transactions appeared in The Post.
The report noted that the director of the Conservancy's Texas division believed "we conducted ourselves aggressively and lost our values," adding that the group's "failure to act with 'integrity beyond reproach' is the gravest mistake that it made."
At the hearing, Grassley said: "It goes without saying that this is not what should be happening at the Nature Conservancy, or any other charity, for that matter."
Staff writer David B. Ottaway contributed to this report.