The Internal Revenue Service (IRS) is ramping up its efforts to combat tax evasion tactics employed by complex partnerships. In a significant move, the agency unveiled a fresh initiative aimed at curbing a practice known as "basis shifting" among related parties, which allows partnerships to exploit loopholes and minimize their tax liabilities.
Basis shifting refers to intricate maneuvers where high-income taxpayers and corporations transfer tax basis from assets with no tax benefits to assets generating tax benefits, without substantially altering the economic substance of their businesses. These transactions enable closely related parties to evade taxes by capitalizing on disparities in the tax treatment of different assets.
The IRS has identified tens of billions of dollars in deductions claimed through these transactions under audit, highlighting the magnitude of the problem. By shifting tax basis from non-depreciable assets, such as stocks and land, to assets that offer depreciation deductions, like machinery, partnerships can artificially reduce their overall tax burden.
The IRS's Multi-Pronged Approach
To combat these abusive transactions, the IRS is taking a multi-faceted approach. The agency has released new guidance classifying such transactions as "transactions of interest," making it easier to identify and audit them. Additionally, the IRS is increasing its audits of large complex partnerships and bringing in more tax experts from outside the agency to help spot tax avoidance strategies.
Furthermore, the IRS Office of Chief Counsel is establishing a new unit dedicated to developing guidance aimed at eliminating these tax loopholes. This new unit will collaborate with a new pass-through work group in the IRS Large and Business International division, which is being established this fall.
Projected Revenue Gains and Impact
The IRS estimates that these measures could generate over $50 billion in revenue over the next decade. By closing loopholes and ensuring partnerships pay their fair share of taxes, the agency aims to promote a more equitable tax system and level the playing field for businesses that operate within the bounds of the law.
However, the IRS has emphasized that these changes will not affect the vast majority of small businesses or family farms, as they are not the primary users of these tax avoidance strategies.
Advice for Tax Professionals
During the press conference announcing the crackdown, IRS Commissioner Danny Werfel and Deputy Secretary of the Treasury Wally Adeyemo urged tax professionals to cease promoting these strategies, as they are inappropriate and will be subject to increased scrutiny and audits.
"The IRS is now better equipped to address these complex partnership transactions due to the Inflation Reduction Act funding," said Werfel. "We will continue to focus on this area and bring more transparency to the process to make it easier to spot abusive transactions."
Public Comment Period and Implementation
The proposed regulations targeting basis shifting transactions will undergo a public comment period before being finalized and implemented. This process allows stakeholders to provide feedback and ensures transparency in the rulemaking process.
As the IRS intensifies its efforts to combat tax avoidance schemes, partnerships and their advisors should carefully review their tax strategies and ensure compliance with the evolving regulatory landscape.
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