In mid-June, the U.S. Treasury and IRS launched an enforcement drive to close loopholes and curb abusive tax schemes involving partnership transactions, which are used by affluent taxpayers looking to circumvent their tax obligations. These tactics involve manipulative basis shifting across interrelated business entities to artificially lower the amount of tax due, an issue exacerbated by historical underfunding of the IRS.
The scheme’s complexity and the decline in audits allowed for its pervasive misuse, leading to projected underpayments of approximately $50 billion over the next decade. With funding from the Inflation Reduction Act, the IRS aims to rectify this by ramping up audits and refining its focus on high-income individuals and intricate business arrangements, marking a significant shift in tax enforcement policy.
IRS Commissioner Danny Werfel emphasized the critical need for this initiative during a recent announcement, noting the detrimental effects of these sophisticated tax avoidance strategies on federal resources and the fairness of the tax system. The IRS is taking robust steps to dismantle these abusive practices by:
- Mandating taxpayer and advisor disclosures from those that engage in these questionable transactions.
- Proposing regulations that would prohibit entities within complex partnerships from reallocating tax bases to unjustly benefit from reduced tax obligations or enhanced deductions.
- Enforcing a revenue ruling that invalidates the economic substance of specific partnership transactions aimed at basis shifting.
This crackdown is part of broader efforts to ensure tax equity and reduce deficits, reinforcing the IRS’s commitment to addressing tax avoidance from all angles. The initiative also involves strategic structural changes within the IRS to focus more effectively on partnerships, S corporations, trusts, and estates, so it can tackle these challenges more adeptly.
If you’re navigating complex tax issues and want honest advice, reach out to us for thorough and compliant tax guidance.