The US Treasury Department and Internal Revenue Service (IRS) are taking a significant step towards closing a tax loophole exploited by the ultra-wealthy. These new regulations target “opaque” business structures that allow the uber-rich to inflate deductions and reduce their tax burden. The proposed rules have the potential to generate an estimated $50 billion in additional tax revenue over the next decade.
Cracking Down on “Related Party Basis Shifting”
The new regulations focus on a specific practice known as “related party basis shifting transactions.” This involves using complex business structures to manipulate the tax basis of assets, essentially inflating the amount of deductions a company can claim. The Treasury Department explains this process as shifting the tax basis from an asset that doesn’t generate tax deductions to one that does, all within the same company operating under different legal entities.
A Growing Tax Gap and Declining Audits
According to the Treasury Department, these “opaque” business structures are a contributing factor to the significant tax gap between what the government is owed and what is actually collected. The department estimates that this gap stands at a staggering $160 billion annually specifically among the top 1% of earners. Further highlighting the issue, the Treasury points to a concerning decline in audits of these high-income earners. Filings from pass-through businesses with over $10 million in assets have seen a 70% increase from 2010 to 2019, while audits for the same category have plummeted from 3.8% to a mere 0.1%.
The Treasury Department emphasizes that these new regulations are the result of extensive research conducted over the past year. The initiative proposes a multi-pronged approach to address the issue. One key element involves increased reporting requirements for companies engaging in basis-shifting transactions. This will provide the IRS with greater transparency and enable them to identify and scrutinize potentially abusive practices.
The IRS is also taking a more direct approach by issuing a revenue ruling. This ruling essentially declares that certain transactions will be challenged if they lack genuine economic substance. In simpler terms, the IRS will no longer accept transactions that are designed solely for tax benefits without any real business purpose.
Focus on High-End Abuses and Additional Resources
Treasury Secretary Janet Yellen emphasized the department’s commitment to tackling “high-end tax abuse from all angles.” She credits resources allocated through President Biden’s Inflation Reduction Act with aiding in the fight against “long-standing abuses.” This suggests that the Biden administration views closing tax loopholes as a key strategy in bolstering government revenue.
The Treasury Department and IRS are committed to an inclusive process. Before finalizing these new regulations, they will accept public comments. This allows stakeholders, including tax professionals and potentially even affected businesses, to provide feedback on the proposed rules.
The proposed regulations represent a significant step towards closing a major tax loophole exploited by the ultra-wealthy. If implemented, these rules could generate substantial new revenue streams for the government. This initiative also signals a broader effort by the US Treasury and IRS to crack down on high-end tax abuse and ensure a more equitable tax system.
