The IRS is on a mission to close a big tax loophole that wealthy individuals have been using. According to the U.S. Treasury Department, this move could bring in over $50 billion in revenue over the next decade.
The new rule, announced on Monday, is targeting something called “partnership basis shifting.” This is when people move assets between related parties to avoid paying taxes.
Officials from the Biden administration have called this tactic a “shell game” and say it doesn’t make sense economically. Thanks to more funding from the 2022 Inflation Reduction Act, the IRS has been able to keep a closer eye on these kinds of moves.
IRS Commissioner Danny Werfel says these tax shelters let rich people get out of paying their fair share of taxes. Because the IRS hasn’t had enough money in the past, they haven’t been able to audit wealthy people as much. This led to more and more partnerships and companies shifting assets around to dodge taxes.
The IRS noticed a big jump in the number of filings from large pass-through businesses doing this kind of tax avoidance, going from 174,100 in 2010 to 297,400 in 2019. But at the same time, the rate of audits for these businesses dropped a lot, from 3.8% to just 0.1%.
The Treasury Department says there’s a huge gap, about $160 billion, between what the richest 1% of people should be paying in taxes and what they’re actually paying.
Miles Johnson, who works at NYU Law’s Tax Law Center, says these kinds of transactions basically make money disappear from the tax system. He thinks it’s a good move by the IRS to stop these transactions by taking away their tax benefits and making it easier to spot them.
This announcement is part of the IRS’s bigger plan to crack down on rich people who cheat on their taxes by using loopholes or not paying at all.
They’ve been going after people who write off personal flights on company jets and making sure millionaires pay what they owe.
The IRS plans to do a lot more audits on companies with assets over $250 million, raising the audit rate to 22.6% by 2026 from 8.8% in 2019. They also want to increase audits by ten times for big, complicated partnerships with assets over $10 million.