Additional Coverage:
- Treasury, IRS announce rules to close ‘major tax loopholes’ for big business, wealthy 1% of taxpayers (newsbreak.com)
On June 17, the Internal Revenue Service (IRS) and the Department of the Treasury announced the introduction of two proposed regulations targeted at closing a significant tax avoidance loophole that has enabled the richest Americans to bypass paying billions in taxes. The Treasury and IRS are taking a comprehensive approach to combat tax evasion among high earners, with Treasury Secretary Janet Yellen stating in a press release that these measures are designed to promote tax equality and lessen the national deficit. According to Yellen, these efforts align with directives from President Joe Biden’s Inflation Reduction Act, empowering the agencies to clamp down on these widespread tax avoidance tactics.
The initiatives focus on what’s known as “related party basis shifting,” which are schemes utilized by corporations and affluent individuals to game the tax system. These loopholes allow for the artificial inflation of tax deductions and the minimization of tax responsibilities, effectively erasing billions of dollars in taxable income. Specifically, these abusive tax strategies involve the transfer of assets among various legal entities under a single business umbrella to exploit tax deductions or diminish the taxable gains from asset sales, thereby dodging rightful tax payments.
IRS Commissioner Danny Werfel highlighted in a press briefing that such tax shelters have historically enabled wealthy taxpayers to avoid their fair share of taxes. The forthcoming regulations, once approved, are expected to terminate these avoidance tactics.
Further illustrating the significant impact of these abuses, the Treasury has documented a concerning trend where tax filings from pass-through businesses—those with assets over $10 million—surged by 70% from 2010 to 2019. Meanwhile, the audit rate for such entities plummeted, exacerbating the challenge in curbing tax evasion. This loophole exploitation is a major contributor to the U.S.’s substantial annual tax gap, which stands at an estimated $160 billion.
A year-long examination by the Treasury into these deceptive practices has projected that the new regulatory crackdown could generate over $50 billion in tax revenue over the next decade by mitigating these so-called “abusive transactions.” In addition to the rule changes, the IRS has announced the formation of a specialized team within its Office of Chief Counsel, designed to offer guidance and spearhead the closure of these and other tax loopholes, aiming to restore fairness to the tax system and reduce the budget deficit.