IRS to close a tax loophole and potentially raise $50B

The Department of the Treasury and Internal Revenue Service (IRS) unveiled new tax regulations on Monday that will target a tax loophole used by the ultra-rich and could rake in $50 billion in tax revenue over the next decade, says Deputy Treasury Secretary Wally Adeyemo.

The changes are also aimed at addressing the tax gap.

The new rule targets a tactic called “partnership basis shifting,” where businesses and individuals transfer assets among related parties to dodge taxes.

The IRS is planning on increasing scrutiny by having more tax audits and stricter regulations. This initiative follows increased funding provided through the 2022 Inflation Reduction Act, enabling the IRS to enhance oversight and enforcement efforts.

Due to past underfunding, the IRS reduced audits of the wealthy, allowing these practices to grow unchecked. From 2010 to 2019, filings for large pass-through businesses jumped 70%, while audit rates dropped.

According to the IRS, approximately 125,000 wealthy individuals failed to file returns since 2017. Noncompliance letters sent in February have already recovered nearly $500 million.

The Treasury estimates a $160 billion gap between what the top 1% of earners owe and what they pay. The regulations are expected to help close that gap.

As part of its broader crackdown on tax evasion, the IRS aims to increase audit rates on companies with assets exceeding $250 million to 22.6% by 2026, up from 8.8% in 2019, and intensify scrutiny on large partnerships.