The IRS is set to eliminate a significant tax loophole exploited by wealthy individuals, potentially generating over $50 billion in revenue over the next decade, according to the U.S. Treasury Department.
Announced on Monday, the proposed rule and guidance aim to halt “partnership basis shifting”—a method used by businesses or individuals to move assets among related parties to evade taxes.
After a thorough evaluation, Biden administration officials found no economic justification for such transactions. Deputy Treasury Secretary Wally Adeyemo described them as “really just a shell game.” This initiative has been facilitated by the increased IRS funding from the 2022 Inflation Reduction Act, which has enabled enhanced oversight and awareness.
“These tax shelters allow wealthy taxpayers to avoid paying what they owe,” stated IRS Commissioner Danny Werfel.
Historical underfunding had previously led the IRS to reduce audits of wealthy individuals, resulting in a rise in asset shifting among partnerships and companies. Filings for large pass-through businesses, often used for tax avoidance, surged by 70% from 174,100 in 2010 to 297,400 in 2019, while audit rates for these entities plummeted from 3.8% to 0.1% during the same period.
The Treasury Department highlighted in its announcement that there is an estimated $160 billion gap between what the top 1% of earners owe and what they actually pay in taxes.
Miles Johnson, a senior attorney adviser and partnership tax specialist at the Tax Law Center at NYU Law, remarked that these transactions effectively make income disappear from the tax system by creating depreciation deductions or other tax reductions that do not reflect any real economic cost. He noted that the proposed rule and guidance indicate the IRS’s intent to curb such transactions by removing their tax benefits and better identifying them as lacking substance.
Monday’s announcement is part of the IRS’s ongoing efforts to target high-wealth tax evaders who manipulate the tax code or fail to pay their taxes. Recent initiatives have included cracking down on improper deductions for personal flights on corporate jets and recovering back taxes from delinquent millionaires.
Looking ahead, the IRS plans to increase audit rates on companies with assets over $250 million to 22.6% by 2026, up from 8.8% in 2019. Additionally, audit rates for large complex partnerships with assets exceeding $10 million are set to increase tenfold.