Treasury, IRS unveil plan to close ‘major tax loophole’ used by large partnerships

The U.S. Department of the Treasury and the IRS on Monday unveiled a plan to "close a major tax loophole" used by large, complex partnerships, which could raise more than an estimated $50 billion in tax revenue over the next 10 years.

The plan targets so-called "related party basis shifting," where single businesses operating through different legal entities trade original purchase prices on assets to take more deductions or reduce future gains, according to the Treasury.

"These tax shelters allow wealthy taxpayers to avoid paying what they owe," IRS Commissioner Danny Werfel told reporters on a press call Friday.

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After a year of studying the basis-shifting issue, the agencies announced their intent to issue proposed regulations. They also released a revenue ruling on related-party partnership transactions involving basis shifting without "economic substance" for the parties or "substantial business purpose."

The plan builds on ongoing IRS efforts to increase audits on the wealthiest taxpayers, large corporations and complex partnerships.

"Treasury and the IRS are focused on addressing high-end tax abuse from all angles, and the proposed rules released today will increase tax fairness and reduce the deficit," U.S. Secretary of the Treasury Janet Yellen said in a statement.

Pass-through business filings with more than $10 million in assets increased 70% between 2010 and 2019, but the audit rate for these partnerships fell from 3.8% to 0.1% during that period, according to the Treasury.

This has contributed to an estimated $160 billion a year tax gap — the shortfall between what is owed and collected — attributed to the top 1% of tax filers, the agency said.

The battle over IRS funding

The announcement comes less than one week after President Joe Biden's top economic advisor unveiled his "key principles" for tax policy, including sustained IRS funding.

"We should ensure ultra-wealthy taxpayers pay what they owe and play by the same rules by maintaining the President's investment in the IRS," White House National Economic Council advisor Lael Brainard told reporters Wednesday during a press call.

IRS funding has been a target for Republicans since Congress approved nearly $80 billion in funding via the Inflation Reduction Act.