IRS Cracking Down on Investor Tax Loophole

Wealthy investors are about to lose a tax loophole that IRS allowed for years. The tax cops say its new policy and enforcement will net billions of dollars in revenue over the next decade to the treasury.

IRS plans “to essentially stop ‘partnership basis shifting’ — a process by which a business or person can move assets among a series of related parties to avoid paying taxes,” reports the Associated Press. Call it a tax loophole or a tax dodge or a tax shelter, the practice is common among hedge fund managers, real estate investors and complex business partnerships. The bottom line: “These tax shelters allow wealthy taxpayers to avoid paying what they owe,” says IRS commissioner Danny Werfel.

Basis shifting allows for “complex business partnerships [to] move assets from one entity to another on paper for no reason other than to avoid taxes,” says the Washington Post. “Shutting down inappropriate basis shifting can increase tax collections from partnerships by at least $5 billion a year over the next decade,” U.S. Treasury deputy secretary Wally Adeyemo told the Post.

Tax Loophole Use Increased by 70% in 2010s

IRS says basis shifting filings for large businesses increased by 70% from 2010 to 2019. Treasury estimates wealthy individuals are underpaying $160 billion in taxes every year due in large part to loopholes like basis shifting.

Slowly but surely, IRS is chipping away at tax loopholes used by the rich and corporations. We reported on how IRS plans to double its audit rate of wealthy individuals earning more than $10 million, from 11% in 2019 to 16.5% in 2026. 

Joe Biden and Democrats are aiming to increase the corporate tax rate from 21% to 28% once the Tax Cuts and Jobs Act expires at the end of 2025. Republicans are pushing to lower the rate to 15% if they take back Congress and the White House (Donald Trump recently suggested a more moderate 20% corporate tax rate).

IRS received nearly $80 billion in new funding from Congress three years ago. Staffing at the service is now above 90,000, its highest level since 2011.