The IRS will be closing a major tax loophole wealthy taxpayers had been using, potentially raising over $50 billion in revenue over the next decade, as the U.S. Treasury Department reported, according to AP News. The new guidance aims to eliminate "partnership basis shifting," a method used by businesses and individuals to move assets among related parties to avoid taxes.
Biden administration officials evaluated the practice and found no economic justification for these transactions. Deputy Treasury Secretary Wally Adeyemo described it as "really just a shell game."
Additional IRS funding from the 2022 Inflation Reduction Act has made increased oversight and awareness of the practice possible.
IRS Commissioner Danny Werfel remarked that these tax shelters allow wealthy taxpayers to avoid paying taxes they rightfully owe.
IRS on Wealthy Taxpayers
Due to past underfunding, the IRS had reduced audits of wealthy individuals, allowing the practice of shifting assets among partnerships and companies to become widespread.
In detail, the IRS found that tax filings by large pass-through businesses, which often use tax avoidance strategies, increased by 70% between 2010 and 2019. This means it grew from 174,100 to 297,400. At the same time, the IRS significantly reduced its audits of these businesses, with audit rates dropping from 3.8% to 0.1%.
The Treasury Department also estimated a $160 billion gap between what the top 1% of earners owe in taxes and what they pay.
However, the recent crackdown will be part of the IRS's effort to target high-wealth tax evaders who manipulate the tax code or fail to pay taxes. This aligns with a VCPost report stating that they have already increased audit rates in May, especially on companies with assets above $250 million, to 22.6% by 2026, up from 8.8% in 2019.
Audit rates on large complex partnerships with assets over $10 million are also set to increase tenfold.
Other initiatives in the past year have included pursuing improper deductions for personal flights on corporate jets and collecting back taxes from delinquent millionaires.
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