The Biden administration has unveiled a new initiative aimed at cracking down on wealthy tax cheats, a move that could potentially generate $50 billion in tax revenue over the next decade. This effort is backed by the significant funding the Internal Revenue Service (IRS) received through the Inflation Reduction Act, passed with strong support from Democrats.
The IRS announced on Monday that it is targeting a major tax loophole frequently exploited by complex business partnerships. This loophole, known as "basis shifting transactions," allows businesses to manipulate asset values to maximize tax deductions and minimize tax liabilities.
"Thanks to resources from President Biden's Inflation Reduction Act, Treasury and the IRS have the tools to stop longstanding abuses," Treasury Secretary Janet Yellen said in a press release.
The focus on closing this loophole comes as the Biden administration seeks to demonstrate effective use of the funds allocated to the IRS from the 2022 legislation. These funds are intended to enhance tax revenue collection and modernize taxpayer services.
The announcement comes amidst a heated debate between Republicans and Democrats over IRS funding. Republicans have criticized the additional funding as wasteful, while Democrats argue it is necessary to ensure tax compliance and fairness.
The IRS initiative includes several pieces of regulatory guidance aimed at addressing the abuse of basis shifting transactions. These transactions involve moving money from one property to another without a substantial business purpose other than to gain tax benefits. IRS Commissioner Danny Werfel emphasized that such practices lack economic substance and are used to inappropriately avoid taxes.
"In the audits we're doing today, we are seeing systemic use of basis shifting where there is no economic substance to the transaction. That is not allowed," Werfel stated during a call with reporters. "This guidance today is intended to end that practice."
Over recent decades, there has been a shift among American businesses from organizing as C corporations, which are subject to corporate tax rates, to partnerships. A Government Accountability Office report highlighted the need for improved IRS efforts to audit the growing number of large, complex partnerships.
The IRS's recent moves also include a broader strategy to ramp up audit rates for wealthy taxpayers and large corporations. Years of underfunding have led to a decline in audit rates for multimillionaires and large corporations, with the agency's compliance offices experiencing a 30% reduction in staffing between 2010 and 2021.
To address this, the IRS is recruiting a diverse range of professionals, including accountants, engineers, economists, data scientists, attorneys, and tax experts, to conduct complex audits. Werfel has assured that American households earning less than $400,000 annually will not see an increase in audit rates, maintaining them at or below 2018 levels.
The IRS is also leveraging funds from the Inflation Reduction Act to enhance taxpayer services. This year, the agency answered one million more calls compared to the previous tax season. Additionally, a pilot version of a free tax filing service, Direct File, was launched, allowing Americans to file their returns directly with the IRS. Over 140,000 individuals used this service successfully, and the agency plans to expand it further in 2025.
The Treasury Department and IRS's latest plan specifically targets related-party basis shifting, where businesses use different legal entities to manipulate asset values for tax benefits. This practice contributes significantly to the annual tax gap, which the Treasury estimates at $160 billion for the top 1% of tax filers.
"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," Secretary Yellen stated.
The announcement follows President Biden's top economic advisor Lael Brainard's recent emphasis on maintaining sustained IRS funding to ensure wealthy taxpayers pay their fair share. IRS funding has been a contentious issue, with Republicans seeking to reduce the nearly $80 billion allocated through the Inflation Reduction Act.
