WASHINGTON — The IRS plans to end a major tax loophole for wealthy taxpayers that could raise more than $50 billion in revenue over the next decade, the U.S. Treasury Department says.
The guidance and ruling being announced Monday includes 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.
Biden administration officials said after evaluating the practice that there are no economic grounds for these transactions, with Deputy Treasury Secretary Wally Adeyemo calling it “really just a shell game.” The officials said the additional IRS funding provided through the 2022 Inflation Reduction Act had enabled increased oversight and greater awareness of the practice.
“These tax shelters allow wealthy taxpayers to avoid paying what they owe,” IRS commissioner Danny Werfel said.
Due to previous years of underfunding, the IRS had cut back on the auditing of wealthy individuals and the shifting of assets among partnerships and companies became common.
The IRS says filings for large pass-through businesses used for the type of tax avoidance in the guidance increased 70% from 174,100 in 2010 to 297,400 in 2019. However, audit rates for these businesses fell from 3.8% to 0.1% in the same time frame.
Treasury said in a statement announcing the new guidance that there is an estimated $160 billion gap between what the top 1% of earners likely owe in taxes and what they pay.
Monday’s announcement is part of the IRS’s ongoing effort to zero in on high-wealth tax cheats who manipulate the tax code or don’t pay their taxes at all.
Initiatives announced in the past year have included pursuing people and businesses that improperly deduct personal flights on corporate jets and collecting back taxes from delinquent millionaires.
The IRS plans to raise audit rates on companies with assets above $250 million to 22.6% in 2026, from an 8.8% rate in the tax year 2019. It also plans to increase audit rates by tenfold on large complex partnerships with assets over $10 million.
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The Internal Revenue Service (IRS) recently proposed closing a major tax loophole that has allowed wealthy individuals to avoid paying their fair share of taxes. The loophole, known as the “stepped-up basis” rule, allows heirs to inherit assets at their current market value, rather than the value at which they were originally purchased. This means that when the assets are eventually sold, the heirs only pay taxes on the increase in value from the time of inheritance, rather than from the time of purchase.
This loophole has been heavily criticized for benefiting the wealthy at the expense of the middle and lower classes, who do not have access to such tax advantages. According to the IRS, closing this loophole could generate an estimated $50 billion in revenue over the next decade.
The proposed change would require heirs to pay capital gains taxes on the full increase in value of inherited assets, regardless of when they were originally purchased. This would bring inherited assets in line with other forms of income, such as wages and salaries, which are taxed at ordinary income tax rates.
Proponents of closing the loophole argue that it is a matter of fairness and equity. They argue that the wealthy should not be able to pass on their wealth to future generations without paying their fair share of taxes. Closing the loophole would also help to reduce income inequality and provide much-needed revenue to fund important government programs.
Opponents of the proposal argue that it could discourage investment and entrepreneurship, as heirs would be faced with higher tax bills when inheriting assets. They also argue that it could lead to double taxation, as assets would be taxed both at the time of inheritance and again when they are eventually sold.
The proposal is likely to face significant opposition from wealthy individuals and special interest groups who benefit from the current tax loophole. However, with growing concerns about income inequality and the need for additional revenue to fund government programs, there is increasing momentum behind closing this loophole.
Ultimately, closing the stepped-up basis loophole could help to level the playing field and ensure that all individuals pay their fair share of taxes. It remains to be seen whether the proposal will be enacted into law, but it is clear that the issue of tax fairness for the wealthy is gaining traction in political circles.
