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The Internal Revenue Service (IRS) announced plans on Monday to close a loophole that rich people have used to avoid paying their fair share of taxes. The agency said it hopes this move will allow it to raise more than $50 billion over the next decade.
Specifically, the IRS issued new guidance to stop the practice of so-called partnership basis shifting transactions, which allows rich taxpayers (or businesses) to move assets to avoid paying taxes.
“In essence, basis shifting amounts to a shell game where sophisticated tax maneuvers take place by shifting the basis of assets between closely related entities, ultimately allowing these complex partnership arrangements to hide from a tax bill,” said IRS Commissioner Danny Werfel.
“This announcement signals the IRS is accelerating our work in the partnership arena, which has been overlooked for more than a decade and allowed tax abuse to go on for far too long,” Werfel said, adding that “billions are at stake here.”
He noted that one of the reasons why the IRS can address this problem now is because it has been given additional resources from the Inflation Reduction Act (IRA), one of President Joe Biden’s signature achievements.
“These complicated maneuvers take time and resources for the IRS to uncover,” Werfel said, noting that the IRA now made them available.
In its announcement, the IRS stated that previous budget cuts had made it more difficult for the agency to go after these wealthy individuals and corporations.
In the decade from 2010 to 2019, tax filings resulting from pass-through partnerships increased by more than 70 percent while audit rates dropped from 3.8 percent to 0.1 percent during that same period.
As part of the effort, the IRS will create a new office that will only focus on partnerships, so-called S-corporations, trusts, and estates.
“This new associate office will allow the chief counsel organization to focus more directly on this complex area of the tax law and allow more attention to legal guidance and other priorities in the partnership arena,” said IRS Chief Counsel Margie Rollinson.
The IRS estimates that wealthy tax cheats are (often legally) swindling the government out of billions of dollars each year.
This is a step in the right direction to change that.
“We need to hone-in on areas where we believe non-compliance has proliferated during the last decade of IRS budget cuts, and partnerships represent an area where complex business structures have allowed millionaires and high-income earners to avoid paying what they legally owe while average taxpayers play by the rules,” said Werfel.
However, the IRS also noted that enforcement of the rules is very complex and news cases could take years to be resolved.
