Wealthy individuals are the target of a new regulatory initiative from the Internal Revenue Service to crack down on a tax loophole that the agency refers to as “partnership basis shifting transactions.”
The IRS says its initiative could raise more than $50 billion over 10 years. It plans to further audit businesses that move money from one property to another to maximize tax deductions and minimize tax liability, such as shifting tax basis from stocks or land — which don’t generate deductions — to tax-deductible assets such as equipment.
“In the audits we’re doing today, we are seeing systemic use of basis shifting where there is no economic substance to the transaction. That is not allowed,” IRS Commissioner Danny Werfel said, according to CNN. “That allows them to inappropriately avoid taxes they owe, and this guidance today is intended to end that practice.”
Due to underfunding, the Biden administration says, the audit rate for businesses exploiting partnership transactions fell from 3.8% in 2010 to 0.1% in 2019. About $80 billion in new funding was directed to the IRS by the Inflation Reduction Act, which was signed into law in 2022.