This loophole, commonly known as partnership basis shifting, has allowed businesses and individuals to manipulate the tax basis from non-deductible properties like stocks or land to deductible ones such as equipment. The primary goal? To sidestep hefty tax bills by devaluing assets through strategic shifts.
Previously hampered by underfunding, the IRS's auditing efforts, particularly among the wealthy, had dwindled. However, the passage of the Inflation Reduction Act in 2022 has turned the tide, boosting both funding and awareness of such evasive practices.
Recent IRS initiatives have zeroed in on groups misclassifying personal expenses as business-related and pursuing unpaid taxes from affluent individuals. This renewed commitment to tax compliance among the wealthy is part of a broader strategy to reduce tax evasion and enforce tax laws more effectively.
In addition to these efforts, the Treasury and IRS are proposing increased reporting requirements for these transactions. They plan to issue rulings informing taxpayers that certain transactions lacking economic substance will be contested.
Looking ahead, the IRS aims to significantly ramp up audit rates for companies with assets exceeding $250 million, targeting a 22.6% audit rate by 2026, a sharp rise from just 8.8% in 2019. Similarly, audit rates for large and complex partnerships with assets over $10 million are set to increase.
To bolster these efforts, the IRS plans to bring in external experts with private sector experience to work alongside IRS staff. This collaboration is expected to offer valuable insights into the sophisticated tactics employed within partnerships.
Additionally, the IRS Office of Chief Counsel is establishing a dedicated office for partnerships, S corporations, trusts, and estates. This new focus will allow the Chief Counsel organization to tackle issues in these areas more effectively, providing specialized legal guidance.
By clamping down on tax avoidance strategies that exploit partnership rules, the IRS aims to ensure that tax benefits are aligned with genuine economic activities, thereby preventing artificial transactions designed solely to minimize tax liabilities.
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