Two new regulations were released by the IRS and Treasury Department on Monday with the goal of closing “a major tax loophole” that has allowed the wealthiest Americans to evade paying tens of billions of dollars in taxes.
Targeting tax loopholes exploited by corporations and rich individuals to manipulate tax laws in order to maximize tax deductions and minimize tax liabilities in order to “make billions of dollars in taxable income disappear,” the Treasury has introduced new regulations that attempt to close what is known as “related party basis shifting”
These procedures allow single companies that function as several distinct legal companies or entities to transfer their assets among those companies in order to take “abusive” tax deductions or to minimize gains upon asset sale, hence removing taxable revenue.
During a press conference on Friday, Internal Revenue Service Commissioner Danny Werfel stated, “These tax shelters allow wealthy taxpayers to avoid paying what they owe.”
If approved, the proposed restrictions will essentially put an end to the practice.
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According to the Treasury, throughout the same period, the audit rate for these partnerships decreased from 3.8% to 0.1%, but tax filings from passthrough entities with assets over $10 million surged by 70%, from 174,100 in 2010 to 297,400 in 2019.
Thus far, this technique, which is credited to the wealthiest 1% of taxpayers, has added to the projected $160 billion annual tax gap, or the difference between what is owed and collected.
After a year of study, the Treasury reported that this “multi-stage regulatory effort” might lead to over $50 billion in tax collection over the following ten years by curbing “abusive transactions” that avoid paying taxes.
President Joe Biden’s Inflation Reduction Act, according to Treasury Secretary Janet Yellen, provided Treasury and the IRS with the “tools to stop” these “longstanding abuses.”
The IRS announced a “dedicated group” to concentrate guidance and on addressing tax loopholes in the IRS’s Office of Chief Counsel as part of this new rule change proposal.
“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,” Yellen stated in a press release.
