The U.S. Department of the Treasury and the IRS announced plans to close a significant tax loophole exploited by large, complex partnerships. This initiative aims to generate more than $50 billion in tax revenue over the next decade. The loophole, known as “related party basis shifting,” allows businesses operating through different legal entities to trade original purchase prices on assets, leading to higher deductions or reduced future gains. According to the Treasury, these tax shelters enable wealthy taxpayers to evade paying their fair share. “These tax shelters allow wealthy taxpayers to avoid paying what they owe,” said IRS Commissioner Danny Werfel.
New Proposed Regulations
Following a year-long study, the Treasury and IRS plan to issue proposed regulations and have released a revenue ruling on related-party partnership transactions involving basis shifting without “economic substance” or “substantial business purpose.” This plan supports ongoing IRS efforts to increase audits on high-income taxpayers, large corporations, and complex partnerships. “Treasury and the IRS are focused on addressing high-end tax abuse from all angles. The proposed rules released today will increase tax fairness and reduce the deficit,” stated U.S. Treasury Secretary Janet Yellen.
Audit Rates and Tax Gaps
The Treasury reports that pass-through business filings with assets over $10 million rose by 70% between 2010 and 2019, while the audit rate for these partnerships dropped from 3.8% to 0.1%. This decrease in audits has contributed to an estimated $160 billion annual tax gap—the shortfall between owed and collected taxes—attributed to the top 1% of tax filers.
Recent Developments in Tax Policy
This announcement follows President Joe Biden’s top economic advisor outlining key tax policy principles, including continued IRS funding. “We should ensure ultra-wealthy taxpayers pay what they owe and play by the same rules by maintaining the President’s investment in the IRS,” said White House National Economic Council advisor Lael Brainard. However, IRS funding has faced opposition from Republicans since Congress approved nearly $80 billion for the agency through the Inflation Reduction Act.
