Topline
The Internal Revenue Service announced plans Monday to crack down on a tax loophole some high earners use to take advantage of tax deductions and avoid taxes—a practice the agency says has surged amid a staffing shortfall and budget deficit at the IRS.
The IRS announced Monday it would more aggressively audit high earners who transfer assets to ... [+]
Key Facts
“Related party basis shifting” is the practice of transferring assets to affiliated legal entities to secure tax deductions and revalue assets at a lower tax rate.
For example, an individual or entity might shift the value of an asset that is not subject to a tax deduction, such as stock or land, to an asset that is, such as equipment, the IRS wrote in a press release.
The “abusive schemes” have “flourished” in recent years as the IRS “was severely underfunded,” hamstringing oversight ability, the agency said in a press release, noting the IRS audited just 0.1% of the complex business structures that facilitate basis shifting in 2019, down from 3.8% in 2010.
The IRS said it will require taxpayers to report if they are participating in basis shifting that exceeds $5 million or more in tax benefits and will create new teams of auditors to monitor such partnerships and challenge ones that “lack economic substance,” new measures the agency estimates could increase tax collections by $50 billion over the next decade.
Chief Critic
“I don’t think it’s tax evasion at all . . . it’s a tax planning tool that follows what Congress said you can do,” Miller & Chevalier lawyer Robert Kovacev told the Washington Post of the practice, predicting the new regulations will face legal challenges.
Big Number
$160 billion. That’s how much the top 1% of earners are saving on taxes through loopholes like basis shifting, compared to what they actually owe.
Key Background
The initiative expands on the Biden administration’s efforts to tamp down high-earner tax loopholes. The Inflation Reduction Act, enacted in 2022, provided an additional $80 billion in IRS funding over the next 10 years, largely aimed at ensuring tax compliance among the wealthy. The IRS in February announced it would crack down on private jet users who are writing off personal travel as a business expense, and said it would more aggressively pursue high earners and large business partnerships that are delinquent on their taxes.
Further Reading
The IRS Wants To End Another Major Tax Loophole For The Wealthy And Raise $50 Billion In The Process (Associated Press)
The IRS Wants To End Another Major Tax Loophole For The Wealthy (ABC News)
