IRS Gears Up to Close Billion-Dollar Loopholes in Partnership Transactions

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Executive Summary

In an effort to combat the abusive use of partnerships for tax evasion, the Internal Revenue Service (IRS) has announced several new measures and guidance. The IRS is establishing a dedicated group in the Office of Chief Counsel to develop guidance on partnerships and close tax loopholes used by high-income taxpayers and corporations, particularly in the area of ‘basis-shifting’ transactions. These measures, which will be supported by increased auditing and reporting requirements, have been necessitated by the potential cost of these abusive transactions to taxpayers, estimated at over $50 billion over 10 years. The focus on partnerships forms part of the IRS’s ongoing commitment to high-income compliance issues and combating tax evasion.

 

IRS Gears Up to Close Billion-Dollar Loopholes in Partnership Transactions

 

The Internal Revenue Service (IRS) has announced a series of strategic initiatives aimed at combating the abusive exploitation of tax loopholes by high-income taxpayers through complex partnerships. The measures, which are expected to significantly enhance compliance with tax laws, have come to the fore following funding from the Inflation Reduction Act.

To implement this, the IRS has created a dedicated group within the Office of Chief Counsel, focusing on developing guidance on partnerships and closing loopholes. This group will work in tandem with a new pass-through work group being established in the IRS Large Business and International division. 

The IRS, in collaboration with the Department of the Treasury, has also released three pieces of guidance on partnerships. These guidelines are designed to stop the use of “basis shifting” transactions that are commonly used by high-income taxpayers and corporations to avoid taxes. Basis shifting essentially involves shifting the basis of assets between closely related entities in a way that allows them to evade tax bills. 

According to the Treasury, such abusive transactions could potentially cost taxpayers more than $50 billion over a 10-year period. They are prevalent across a wide range of industries and amongst individuals, making them a significant concern for the IRS.

To tackle these concerns, the IRS will be using funds from the Inflation Reduction Act to strengthen enforcement measures among high-income taxpayers and corporations, with a particular focus on partnerships. Current audits are being reviewed and examiners are being equipped to identify these issues in other partnership returns.

The IRS has witnessed a significant increase in tax filings from pass-through businesses with assets over $10 million. However, the audit rates have drastically decreased due to budget cuts over the past decade, providing a fertile ground for tax evasion. To counter this, the IRS is adding more top talent to enhance compliance work in this area.

In addition to these measures, the IRS has also launched audits on 76 of the largest partnerships, including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms, and many other industries. These audits are in various stages and could take years to complete due to the size and complexity of the partnerships.

As part of its intensified focus on partnerships, IRS Chief Counsel Margie Rollinson announced the creation of a new Associate Office that will focus exclusively on partnerships, S-corporations, trusts, and estates. This Office will work in close coordination with IRS business units, such as the LB&I, which has announced plans to establish a special work group focused on pass-throughs, including complex partnerships.

The IRS’s new approach signals a significant shift in its focus, highlighting the importance of curbing tax evasion through partnerships. With these measures in place, the IRS aims to ensure that all taxpayers, irrespective of their income, comply with the tax laws and contribute their fair share to the nation’s coffers.

For over 100 years, Packer Thomas has served generations of business owners, families, and others with tax, auditing, accounting, and information technology services. But we didn’t last that long by standing still. We’ve evolved to meet the needs of our clients who are also facing challenging changes in their financial, tax, and information technology environments.

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