IRS Plans to Close Major Tax Loophole Saving Taxpayers $50 Billion

The IRS Plans to Close a Major Tax Loophole, Saving Taxpayers Billions

The Internal Revenue Service (IRS) is planning to close a major tax loophole that has been used by wealthy taxpayers to avoid paying their fair share of taxes. The loophole, known as "partnership basis shifting," allows businesses or individuals to move assets among a series of related parties to avoid paying taxes. The IRS estimates that closing this loophole could raise more than $50 billion in revenue over the next decade. The proposed rule and guidance announced Monday includes plans to essentially stop “partnership basis shifting." This would be a significant blow to wealthy taxpayers who have been using this loophole to avoid paying taxes. - IRS Commissioner Danny Werfel said:

"These tax shelters allow wealthy taxpayers to avoid paying what they owe."

- Treasury Secretary Wally Adeyemo said:

"These transactions, which have no economic substance, are really just a shell game."

How Partnership Basis Shifting Works

Partnership basis shifting is a complex tax avoidance strategy that involves moving assets among a series of related parties. This can be done through a variety of methods, such as creating multiple partnerships or using different legal entities. The goal of partnership basis shifting is to create a situation where the assets are owned by an entity that is not subject to tax, or where the basis of the assets is reduced, which reduces the amount of tax that is owed. For example, a wealthy individual might create a partnership with a related party, such as a spouse or child. The individual might then transfer assets to the partnership, which would then sell the assets and use the proceeds to make investments. The individual would then report the income from the investments on their tax return, but they would not have to pay any taxes on the gain from the sale of the assets.

IRS Cracking Down on Tax Avoidance

The IRS has been cracking down on tax avoidance in recent years. In 2022, the IRS announced a new initiative to target high-wealth tax cheats who manipulate the tax code or don't pay their taxes at all. The IRS has also increased its audit rates for wealthy individuals and businesses. The IRS plans to raise audit rates on companies with assets above $250 million to 22.6% in 2026, from an 8.8% rate in the tax year 2019. It also plans to increase audit rates by tenfold on large complex partnerships with assets over $10 million. These increased audit rates are a sign that the IRS is taking tax avoidance seriously. The IRS is committed to ensuring that everyone pays their fair share of taxes, and it is using its resources to crack down on tax cheats.