IRS Commissioner Danny Werfel testifies before the House Appropriations Committee in Washington, DC on May 7, 2024.
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The U.S. Treasury Department and the IRS on Monday unveiled a plan to “close a major tax loophole” exploited by large, complex partnerships, potentially generating more than $50 billion in tax revenue over the next decade.
According to the Treasury Department, the plan is aimed at what is known as “related party basis shifting.” This involves individual companies operating under different legal forms trading the original purchase prices of their assets in order to claim higher deductions or reduce future profits.
“These tax havens allow wealthy taxpayers to avoid paying their tax debts,” IRS Commissioner Danny Werfel told reporters at a press conference on Friday.
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After a year of studying the issue of base shifts, the authorities announced their intention to issue proposed regulations. They also published a tax ruling on transactions between related parties where the base shift occurs without “economic substance” for the parties or “substantial business purpose.”
The plan builds on the IRS's ongoing efforts to expand audits of the wealthiest taxpayers, large corporations and complex partnerships.
“The Treasury Department and the IRS are focused on tackling high-end tax abuse from all angles, and the proposed rules released today will increase tax fairness and reduce the deficit,” U.S. Treasury Secretary Janet Yellen said in a statement.
Filings of pass-through entities with assets of more than $10 million increased 70% between 2010 and 2019, but the audit rate for these partnerships fell from 3.8% to 0.1% during that period, according to the Treasury Department.
This has resulted in a tax gap of an estimated $160 billion a year – the difference between taxes owed and taxes collected – borne by the top 1 percent of taxpayers, the agency said.
The battle for IRS funding
The announcement comes less than a week after President Joe Biden's top economic adviser unveiled his “key principles” for tax policy, including continued funding for the IRS.
“We should ensure that super-rich taxpayers pay their tax debts and follow the same rules by maintaining the president's investment in the IRS,” Lael Brainard, a White House National Economic Council adviser, told reporters at a press conference on Wednesday.
IRS funding has been in the Republican sights since Congress approved nearly $80 billion in aid through the Inflation Control Act.
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