WASHINGTON (dpa-AFX) - The U.S. Department of the Treasury and the Internal Revenue Service have announced a new regulatory initiative to close a major tax loophole exploited by large, complex partnerships. It aims to close loopholes and shut down abusive transactions using existing regulatory authority and ensure wealthy individuals, complex partnerships, and large corporations do not evade paying taxes they owed.
The Treasury and IRS said a guidance released Monday kicks off a multi-stage regulatory effort that will stop large, complex partnerships from using opaque business structures to inflate tax deductions and avoid taxes. Once complete, Treasury estimates this initiative could raise more than $50 billion in revenue over 10 years.
The new guidance will also complement the IRS' ongoing enforcement campaign to recover revenue from large partnerships that are not paying the taxes they owe.
Among the techniques these taxpayers rely on to make billions of dollars in taxable income disappear are what are known as partnership basis shifting transactions.
Wealthy taxpayers and businesses are paying accountants and lawyers millions of dollars to develop these complex, abusive transactions, costing the federal government billions of dollars each year. And while these abusive schemes flourished, the IRS was severely underfunded, so audit rates for these increasingly complex structures plummeted, according to the Treasury.
Filings from passthrough businesses with more than $10 million in assets increased 70 percent in a decade. But the audit rate for these partnerships fell from 3.8 percent in 2010 to 0.1 percent in 2019. The combination of fewer resources to unpack ever more complicated business structures made it easier for wealthy taxpayers to avoid paying what they owe and are contributing to the estimated $160 billion per year tax gap attributed to the top 1 percent of filers, the Treasury said.
Treasury and IRS have announced a proposal under existing regulatory authority to stop related parties in complex partnership structures from shifting the tax basis of their assets among each other to take abusive deductions or reduce gains when the asset is sold, effectively making taxable income disappear. In addition, Treasury and IRS are proposing to increase the reporting of these transactions to the IRS and are providing a ruling to inform taxpayers that certain transactions will be challenged for lack of economic substance.
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