IRS To Crack Down On 'Basis Shifting' Tax Avoidance Used By Business Partnerships

The Biden administration is ramping up new audit teams and regulations to collect some $50 billion in taxes over the next decade from business partnerships such as hedge funds, real estate investors and wealthy individuals it says inappropriately use “basis shifting” to avoid paying taxes, the Treasury Department announced.

The Biden administration says business partnerships are shielding tens of billions of dollars from taxation by using basis shifting, which allows them to move assets from one entity to another on paper for no reason other than to reduce or avoid taxes.

At the heart of the concern is partnerships’ use of “pass-through” business structures that allow them to link entities for purposes of selling assets so that taxes are determined only after subtracting the assets’ original cost, or basis, from profits. By moving such assets from entity to entity on paper, hedge funds, wealthy investors and other businesses are able to manipulate their basis and inappropriately reduce their tax liabilities, officials argued.

As a result, some businesses and wealthy individuals are depreciating the same asset repeatedly, officials said.

Such basis shifting fails “to create any economic activity for the nation,” Treasury Deputy Secretary Wally Adeyemo told reporters, adding that such partnerships’ “sole purpose is to reduce tax bills."

The Biden administration said in a statement today that the basis-shifting maneuvers, which are promoted by attorneys and CPAs, have soared in popularity in the last two decades, allowing wealthy investors to shield assets, while largely flying under the radar of the IRS.

Treasury officials said they are taking a multiprong approach to begin collecting the additional $50 billion of the next 10 years, or $5 billion annually, from partnerships.

IRS Commissioner Danny Werfel told reporters that the IRS has created a unit solely dedicated to investigating business partnerships and is dedicating some of the hundreds of new auditors it hired this year to create audit teams. Some of the new employees have already found what they believe to be illegal or inappropriate basis shifting accounting, he said.

In the audits the IRS is already conducting, “we are seeing this systemic use of basis shifting where there is no economic basis to the transaction,” Werfel said. “That is not allowed.” The discovery of what he said were potentially tens of billions of dollars in untaxed transactions led the service to dedicate resources to business partnership audits.

At the same time, the IRS is creating extensive guidance for accountants, attorneys and taxpayers that underscores that the agency believes that basis shifting done for the sole purpose of tax avoidance is illegal and will open up pass-through entities to audits. The guidance will also require partnerships to provide more details about their asset transactions and basis accounting, Werfel said.

Treasury said in a statement announcing the new guidance that there is an estimated $160 billion gap that the top 1% of earners likely owe in taxes and what they pay.

The new regulations will take the form of three different notices of proposed rulemaking and an additional revenue ruling from the IRS, which will be open to the public for comment, Werfel said.