The U.S. Treasury Department, in collaboration with the Biden administration, has unveiled robust measures designed to close a significant tax loophole known as “partnership basis shifting.” This practice has allowed wealthy taxpayers to exploit the tax code by transferring assets among related parties within partnerships, effectively reducing their tax liabilities.
Announced on Monday, the new guidance targets transactions that lack economic substance, emphasizing that they serve primarily as mechanisms to avoid paying taxes rather than legitimate business operations. Deputy Treasury Secretary Wally Adeyemo characterized these maneuvers as a “shell game,” highlighting their deceptive nature in circumventing tax obligations.
The initiative comes on the heels of increased funding allocated to the IRS through the 2022 Inflation Reduction Act. This funding infusion has bolstered the IRS’s enforcement capabilities, enabling enhanced oversight and enforcement measures specifically aimed at curbing abusive tax practices like partnership basis shifting. IRS Commissioner Danny Werfel underscored the necessity of these measures, asserting that they are essential to ensuring that high-income individuals fulfill their tax obligations fairly.
Data provided by the IRS reveals a stark increase in filings utilizing these tax avoidance strategies among large pass-through businesses over the past decade. Despite the surge in filings, audit rates for these entities plummeted significantly during the same period, reflecting a weakening of IRS enforcement due to previous years of underfunding.
Treasury officials estimate a substantial tax gap amounting to approximately $160 billion between what the wealthiest 1% of earners likely owe in taxes and what is actually paid. This disparity underscores the magnitude of tax avoidance facilitated by such loopholes and underscores the urgent need for corrective action.
As part of its strategy to address these issues, the IRS plans to ramp up audit rates for corporations with assets exceeding $250 million. By 2026, audit rates for these companies are expected to reach 22.6%, up from just 8.8% in 2019. Additionally, the IRS will significantly increase scrutiny on large, complex partnerships with assets exceeding $10 million, aiming to bolster compliance and deter abusive tax practices.
Overall, the Treasury Department’s latest initiative marks a pivotal step towards closing loopholes exploited by wealthy taxpayers. It reflects the administration’s commitment to fostering fairness and equity in the tax system, ensuring that all taxpayers, especially those with substantial financial resources, contribute their fair share to support public services and infrastructure.