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IRS crackdown on partnership tax loophole could bring in billions

IRS tightening rules to end partnership basis shifting and increase audits for larger companies.

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The IRS has announced a series of measures to end a major tax loophole that could add over $50 million to the U.S. government’s pockets over the next decade.

The loophole, more commonly referred to as partnership basis shifting, allows businesses or individuals to change tax basis from a property that does not generate tax deductions, such as stocks or land, to a property that does, such as equipment. 

The singular reason for this practice is to avoid tax bills by shifting assets around to decrease their value, and there’s been a significant increase in these kinds of maneuvers. 

Due to underfunding in previous years, the IRS was auditing the wealthy less and less, but since the Inflation Reduction Act passed in 2022, funding has increased and so has awareness of this practice. 

Recent initiatives have included cracking down on groups who are deducting personal expenses as business-related, and pursuing unpaid taxes from wealthy individuals.

The IRS’s commitment to ensuring tax compliance among wealthy individuals and entities aims to reduce tax evasion and effectively enforce tax laws.

In addition, the Treasury and IRS are proposing that the reports of these transactions will increase. They will also provide a ruling to inform taxpayers that certain transactions will be challenged for lacking economic impact.

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Looking ahead, the IRS plans to significantly increase audit rates for companies with assets exceeding $250 million, aiming for a rate of 22.6 percent by 2026. In 2019,  the IRS audited just 8.8 percent. 

Audit rates for large and complex partnerships with assets over $10 million are projected to increase.

The IRS plans to hire external experts with private sector experience to collaborate with IRS staff. This external perspective will provide insights into the tactics occurring within partnerships.

As a result, the IRS Office of Chief Counsel is establishing an office specifically for partnerships as well as S corporations, trusts and estates. This initiative will allow the Chief Counsel organization to concentrate more directly on addressing issues in these areas, providing legal guidance related to partnerships.

These measures will curb tax avoidance loopholes that exploit partnership rules. By ensuring that tax benefits are derived from genuine economic activities, the IRS hopes to prevent artificial transactions designed solely to reduce tax liabilities.

Mary Claire is a reporting intern.

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