The Internal Revenue Service announced Monday a crackdown on a complex maneuver that corporations and wealthy individuals use to avoid taxes, marking the agency’s latest enforcement action since receiving a badly needed infusion of funding from the Inflation Reduction Act.
The new IRS policy targets a tactic known as “basis shifting,” where business partners move the tax basis of their assets among each other to take abusive deductions or reduce gains when the asset is sold. This process effectively makes taxable income disappear, as explained by the Treasury Department.
“This announcement signals the IRS is accelerating our work in the partnership arena, which has been overlooked for more than a decade and allowed tax abuse to go on for far too long,” said Danny Werfel, the commissioner of the IRS. “We are building teams and adding expertise inside the agency so we can reverse long-term compliance declines that have allowed high-income taxpayers and corporations to hide behind complexity to avoid paying taxes. Billions are at stake here.”
The Treasury Department estimates that the new IRS initiative could raise more than $50 billion in federal revenue over the next decade. This effort to close loopholes exploited by the super rich aims to reclaim significant funds for the federal government.
Basis shifting involves moving the tax basis of assets among partners to reduce taxable gains or take deductions. This tactic allows high-income taxpayers and corporations to strip basis from assets that do not generate tax benefits and transfer it to assets that will, without causing any meaningful change to the business’s economics. As a result, taxable income is reduced or eliminated, leading to significant tax avoidance.
The Treasury Department highlighted the substantial impact of this tactic, estimating that it could potentially cost taxpayers more than $50 billion over a 10-year period. By targeting basis shifting, the IRS aims to address a significant area of tax non-compliance.
The IRS has announced a series of steps to combat abusive partnership transactions, including the creation of new dedicated teams within the agency. These teams will focus on developing guidance on partnerships and closing loopholes. The agency has established a new group in the Office of Chief Counsel specifically focused on partnerships, and a pass-through work group in the IRS Large Business and International division will be formally established this fall.
The IRS and the Department of the Treasury have issued three pieces of guidance focused on partnerships following discoveries by IRS audit teams. This new guidance is designed to stop the use of basis shifting transactions that allow related-party partnerships to avoid taxes.
Werfel emphasized that the guidance is aimed at promoters of these transactions, signaling that the IRS considers them inappropriate. The agency is leveraging resources from the Inflation Reduction Act to enhance compliance work in the overlooked partnerships and pass-throughs area.
Sen. Elizabeth Warren (D-Mass.) applauded the IRS’s initiative, stating that the Biden administration is “right to end these shell games.” Warren emphasized that the super-wealthy use complex tax schemes to avoid paying what they owe and credited the well-funded IRS with closing the loophole to ensure the rich pay their taxes.
However, Republican lawmakers are currently trying to slash IRS funding and scrap the free online tax-filing system launched by the agency this year. House Republicans have proposed cutting IRS funding for fiscal year 2025 by $2.2 billion, specifically targeting enforcement resources.
The IRS estimated earlier this year that if Republican efforts to roll back funding increases are unsuccessful, the agency could collect roughly $560 billion from big corporations and wealthy tax cheats over the next 10 years. Former U.S. Labor Secretary Robert Reich highlighted the importance of funding the IRS, noting that adequate resources are crucial for the agency to pursue high-income tax dodgers effectively.
The Treasury Department projects that the crackdown on basis shifting will generate over $50 billion in federal revenue over the next decade. This significant increase in revenue is expected to come from enhanced enforcement among high-income taxpayers and corporations.
The IRS’s new guidance provides greater clarity to taxpayers and examiners, increasing reporting requirements under the Transactions of Interest (TOI) to give the IRS better awareness of these arrangements. This guidance aims to curb the marketing of basis shifting transactions, which have been increasing.
IRS budget cuts over the past decade have hampered the agency’s ability to enforce compliance, particularly among partnerships and pass-through entities. Audit rates fell from 3.8% in 2010 to 0.1% in 2019, while tax filings from pass-through businesses with more than $10 million in assets increased significantly.
The Inflation Reduction Act has empowered the IRS with resources to target complex tax avoidance schemes. The agency is using this funding to strengthen enforcement among high-income taxpayers and corporations, with a special focus on partnerships.
The IRS is planning ongoing and future steps to enhance compliance among partnerships and high-income earners. The agency is bringing in outside experts with private-sector experience to work alongside current IRS employees. This effort aims to address areas of non-compliance that have proliferated during the last decade of IRS budget cuts.
Monitoring the effectiveness of the new policies will be crucial. The IRS plans to continuously improve and adjust strategies based on evolving tax avoidance tactics.
“We need to hone in on areas where we believe non-compliance has proliferated during the last decade of IRS budget cuts, and partnerships represent an area where complex business structures have allowed millionaires and high-income earners to avoid paying what they legally owe while average taxpayers play by the rules,” said IRS Commissioner Danny Werfel.
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