LifestyleScripps News Life

Actions

IRS plans to close major tax loophole for wealthy, raise $50 billion in the process

The proposed initiative aims to stop "basis shifting" transactions, which the IRS says make billions of dollars in taxable income disappear for wealthy taxpayers.
irs
Posted

The Internal Revenue Service is cracking down on a "major tax loophole" that wealthy individuals, complex partnerships and corporations use to skirt the taxes they owe — and it could raise more than $50 billion in revenue over the next 10 years.

In partnership with the U.S. Department of Treasury, the IRS announced Monday a new initiative that will essentially stop "basis shifting" transactions, in which a single business or person shifts assets from multiple related parties they operate to maximize tax deductions, minimize tax liability and possibly depreciate the same asset repeatedly.

"For example, a partnership might shift tax basis from property that does not generate tax deductions (such as stock or land) to property that does (such as equipment)," the Treasury said.

The federal department describes this as one technique wealthier taxpayers "rely on to make billions of dollars in taxable income disappear" while costing the federal government billions annually. It also noted that these "abusive schemes flourished" while the IRS was severely underfunded and audit rates plummeted.

"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," Treasury said.

Now after over a year of studying the issue and with the help of resources from President Biden's Inflation Reduction Act, the Treasury and the IRS plan to target basis-shifting transactions that aim to take abusive deductions or reduce gains when the asset is sold. Plus, the two entities are proposing an increase in the reporting of these transactions to the IRS.

Once the proposed regulations are finalized, basis shifting will be stopped among members of a consolidated group.

This is one of multiple efforts the IRS has undertaken recently to identify wealthy tax cheats. Earlier this year, it said it would start auditing how businesses' private jets are used by employees then written off as tax deductions, and it later announced a plan to go after 125,000 taxpayers making more than $400,000 who hadn't filed tax returns since as far back as 2017.