The Department of Treasury is taking aim at the basis-shifting practices of partnerships.
The Internal Revenue Service (IRS) recently announced plans to remove a loophole that allows entities or individuals to shift assets among associated parties, a process called “partnership basis shifting,” that gradually sheds tax liabilities along the way.
Said IRS Commissioner Werfel, “This announcement signals the IRS is accelerating our work in the partnership arena, which has been overlooked for more than a decade and allowed tax abuse to go on for far too long. We are building teams and adding expertise inside the agency so we can reverse long-term compliance declines that have allowed high-income taxpayers and corporations to hide behind complexity to avoid paying taxes. Billions are at stake here.”
The IRS projects the elimination of abusive basis-shifting across industry and U.S. persons could redirect upwards of $50 billion back into the Treasury. As part of its partnership audit initiative, the IRS has developed new guidance for audit examiners and taxpayers alike. Along with the announcement, the IRS released new guidance concerning transactions between partnership related-parties.
The guidance outlines three types of transactions on which the agency intends to focus:
- Property distribution: These rules relate to partnerships and related parties that shift a high-basis asset to another partner with a “low outside basis.” The resulting transaction process is crafted with low-impact to related parties while creating a tax savings at the same time.
- Partnership liquidation: Under liquidation regulations, related-partners revise the basis of an asset to amplify tax benefits.
- Partnership interest transfer: This group of transactions takes advantage of regulations to shift partnership interests among associated partners to obtain tax benefits.
Overall, the guidance is intended to provide clarity to legal and tax professionals regarding the illegality of basis-shifting purely to evade taxes. New regulations will require greater transactional transparency as allow the IRS to build auditing teams trained to take a deep dive into partnership audits.
While legal challenges to the new action may lie ahead, there is no question that the IRS is upping its game on large partnership audits. Said Mr. Werfel, “We are continuing to accelerate our work in this area. We need to hone in on areas where we believe non-compliance has proliferated during the last decade of IRS budget cuts, and partnerships represent an area where complex business structures have allowed millionaires and high-income earners to avoid paying what they legally owe while average taxpayers play by the rules.”
When you have questions about tax benefits and partnership practices, speak with an experienced corporate tax attorney.
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