Key Points

  • The U.S. Treasury Department and the Internal Revenue Service announced Monday that they plan to halt the "smoke and mirrors" operations of large, complex partnerships that use basis shifting—transferring the tax basis of non-depreciable assets to depreciable assets to obtain additional deductions. The Treasury said closing this loophole is expected to bring in more than $50 billion in additional tax revenue over the next decade.
  • This move is part of the Biden administration's broader effort to strengthen tax enforcement and ensure that large corporations, partnerships, and wealthy individuals pay their fair share of taxes. The Treasury noted that the top 1% of taxpayers evade about $160 billion in taxes each year.
  • Treasury Secretary Janet Yellen said in a statement: "The Treasury Department and the IRS are working to address high-end tax abuse from every angle, and the proposed rules issued today will enhance tax fairness and reduce the deficit."

Deeper Dive

Since Congress approved an additional $80 billion in funding for the IRS in 2022 under the Inflation Reduction Act, partisan battles over tax policy and IRS funding have intensified.

This year, Republican lawmakers pressured President Joe Biden to cut $20 billion in IRS funding in spending agreements. A Treasury and IRS study showed that a $20 billion cut would reduce tax revenue by more than $100 billion over the next decade.

The Biden administration has requested an additional $104 billion for the IRS starting in 2026, which, according to IRS Commissioner Daniel Werfel, would generate about $341 billion in additional revenue over ten years through enhanced enforcement and other operational measures.

Werfel said that thanks to the increased funding from the Inflation Reduction Act, the IRS expects to raise $700 billion over the next decade through enforcement actions against complex partnerships, "millionaires and billionaires," and companies that shift profits and income to offshore tax havens.

The Treasury said the prevalence of basis shifting among corporations and wealthy taxpayers is due to declining audit rates as congressional funding decreased, funding that is crucial for the IRS to keep up with increasingly complex tax filings.

According to Treasury data, the number of filings by pass-through entities with assets over $10 million surged 70% from 2010 to 2019, while the audit rate fell from 3.8% to 0.1% during the same period.

"The IRS is accelerating its work in the partnership area, which has been neglected for over a decade, allowing tax abuse to persist for too long," Werfel said in a statement Monday.

"We are building teams and adding specialized expertise within the agency to reverse a long-standing compliance decline that has allowed high-income taxpayers and corporations to hide behind complexity to evade taxes," he added. "Billions of dollars are at stake."

Werfel noted that accountants, lawyers, and other tax experts have been increasingly promoting basis shifting.

"Essentially, basis shifting is a smoke-and-mirrors trick," he said. "The new guidance aims to inform promoters that the IRS considers these transactions improper, and we are directing new resources from the Inflation Reduction Act into compliance efforts."

Idaho Republican Senator Mike Crapo, along with several Republicans, criticized the IRS for requesting additional funding despite limited progress on operational improvements such as taxpayer services. Crapo is a senior member of the Senate Finance Committee.

Democrats, meanwhile, said Republican opponents aim to shield the wealthy from IRS scrutiny.

"Corporate taxation is riddled with loopholes, loopholes, and more loopholes," Massachusetts Democratic Senator Elizabeth Warren, a Finance Committee member, said in a speech Monday.

Facing the prospect of the IRS cracking down on tax cheats, Warren said: "Wealthy tax evaders must be sweating now, because the IRS has enough funding to enforce the law."