US: IRS Takes Aim at a $50 Billion Loophole for Wealthy Taxpayers

The IRS announced Monday that it plans to eliminate a loophole used by large, complex partnerships to avoid taxes – a move that could raise more than $50 billion over the next decade.

The tax agency is taking aim at “partnership basis shifting transactions,” in which businesses that operate through multiple legal entities make income disappear by moving transactions through those entities while claiming tax breaks such as depreciation at each step in the process.

The IRS said that chronic underfunding has allowed the abusive practice to thrive as accountants and lawyers have developed more complex structures to reduce taxes – complexity the agency couldn’t keep up with, at great cost in lost government revenues. “The combination of fewer resources to unpack ever more complicated business structures made it easier for wealthy taxpayers to avoid paying what they owe and are contributing to the estimated $160 billion per year tax gap attributed to the top 1 percent of filers,” the agency said in a press release.

According to IRS Commissioner Danny Werfel, recent audits have revealed how pervasive the problem has become. “In the audits we’re doing today, we are seeing systemic use of basis shifting where there is no economic substance to the transaction,” he told reporters. “That allows them to inappropriately avoid taxes they owe, and this guidance today is intended to end that practice,” he added.

Treasury Secretary Janet Yellen linked the crackdown to the Biden administration’s broader effort to reduce tax cheating by corporations and the rich. “Treasury and the IRS are focused on addressing high-end tax abuse from all angles, and the proposed rules released today will increase tax fairness and reduce the deficit,” she said. “Thanks to resources from President Biden’s Inflation Reduction Act, Treasury and the IRS have the tools to stop longstanding abuses.”

Still, the IRS’s effort to end the practice will likely meet resistance. Attorney Robert Kovacev, who has represented firms that have been audited for basis shifting, told The Washinton Post he doesn’t think basis shifting is tax evasion. “That has a fraudulent tinge to it that I don’t think exists here,” he said. “It’s a tax planning tool that follows what Congress said you can do.” Kovacev added that he doesn’t think the IRS has the authority to change the rules, which would require an act of Congress, and that the effort to eliminate the practice will be challenged in court.