On Monday, June 17, the Internal Revenue Service (IRS) of the United States announced a new regulatory measure to close a significant tax loophole being exploited by large complex partnership enterprises. This initiative is expected to generate over $50 billion in additional revenue over the next decade.
The IRS and the Department of Treasury released three guidelines focusing on partnership issues identified by the IRS audit division. This includes putting a stop to “basis shifting” transactions, where assets are transferred among a series of related parties to avoid taxation.
Currently, the IRS is auditing hundreds of billions of dollars in deductions claimed in these transactions.
The IRS stated on Monday that with funding from the Inflation Reduction Act, their compliance efforts in this complex legal area are accelerating. As part of this effort, the IRS Chief Counsel’s office announced the establishment of a new Associate Office dedicated to developing guidance on partnership enterprises, including closing loopholes.
IRS Commissioner Danny Werfel stated, “Today’s guidance is another sign that the IRS’s compliance activities regarding partnership enterprises are intensifying. There are indications that marketing activities promoting basis shifting transactions are increasing, hence the need for such guidance.”
Werfel added, “In essence, basis shifting is akin to a scam, involving complex tax maneuvers through transferring asset bases between closely related entities, ultimately allowing these intricate partnership arrangements to evade taxes.”
“The IRS needs time and resources to uncover these complex operations. The new guidelines aim to indicate to initiators that the IRS views these transactions as inappropriate. We are utilizing resources from the new Inflation Reduction Act to bolster our compliance efforts in the overlooked areas of partnership and pass-through entities,” Werfel said.
Due to budget constraints in previous years, the IRS had reduced its audit work, leading to an increase in asset transfers between partnership enterprises and companies.
IRS noted that in 2019, the number of tax returns filed by pass-through businesses with assets exceeding $10 million surged to nearly 300,000, a 70% increase from 2010. However, during the same period, the audit rate for these enterprises dropped from 3.8% to 0.1%.
The Department of Treasury stated in a press release that the guidance issued by the Treasury and IRS initiates a multi-phase regulatory effort to prevent large, complex partners from using opaque business structures to overstate tax credits and avoid taxes.
The Treasury estimates that once implemented, this measure could generate over $50 billion in revenue over 10 years compared to allowing these abusive practices to continue unchecked, potentially even more.
The new guidance will also complement the enforcement actions currently undertaken by the IRS to recover income from large partnership enterprises that have failed to pay owed taxes.