America’s tax system harbors numerous loopholes, and partnerships are increasingly exploiting one of the most significant by trading “basis” like collectibles. Basis is the taxpayer’s remedy—the more you have, the less you owe. The Treasury Department contends that basis shifting without economic rationale contravenes congressional intent. Its objective is to recuperate tens of billions in lost revenue while establishing a more equitable tax system. However, halting partnership basis shifting remains an arduous endeavor.
The perception some hold that the Treasury’s agenda is an anti-business campaign is misguided. With a Congress that often works to limit IRS funding, and the U.S. Supreme Court’s recent decision to restrict regulatory agency powers, the IRS faces substantial obstacles in addressing these tax strategies.
The Treasury advocates for partnerships to preserve basis for transactions with tangible economic consequences, relying on expanded regulations, audits of large partnerships and wealthy individuals, and promoting compliance through education and deterrence. The department asserts that if high-income entities and individuals reported incomes at the compliance rate of wage earners (99%), the federal government would generate approximately $700 billion more in tax revenue, thereby making the tax system more progressive and reducing wealth disparities.
However, consistent congressional resistance complicates the Treasury’s efforts. Over the past 15 years, persistent budget cuts to the IRS have benefitted large businesses and wealthy individuals. From 2010 to 2021, the IRS’s budget was reduced by almost 20%, even as the number of tax returns increased by 7%. This resulted in a significant decline in IRS staffing and enforcement capabilities, with audits on millionaires falling by more than 70% while scrutiny on low-income taxpayers increased.
The Supreme Court’s decision in Loper Bright Enterprises v. Raimondo further complicates regulatory efforts by exposing any regulation to increased judicial scrutiny. The elimination of Chevron deference, which had previously protected agency regulations from frequent judicial interference, represents a significant shift. Coupled with concerns about the financial ties between some justices and wealthy individuals, this regulatory environment poses dire challenges for IRS initiatives aimed at curbing tax avoidance.
The tax profession appears undeterred, with many predicting a rocky path ahead for the Treasury’s proposed partnership regulations. In an era where administrative agencies have been stripped of significant regulatory power, the outlook for enforcing new tax rules appears dim. This legislative and judicial landscape makes it unlikely that the current efforts to close tax loopholes will succeed, leaving the IRS struggling to enforce compliance and collect owed taxes.
It is a troubling prospect that these regulatory and legislative barriers may exacerbate fiscal deficits and potential tax increases for the general populace while allowing affluent taxpayers to continue capitalizing on existing loopholes. The gap between owed and paid taxes escalated to an estimated $625 billion in 2021, with pass-through entities like partnerships significantly contributing to this discrepancy due to their complex income tracking mechanisms.
Investing a portion of uncollected taxes could address critical social issues such as homelessness, hunger, and student debt. Nevertheless, the prevailing political and judicial climate favors reducing the IRS’s capacity to collect these funds effectively, perpetuating a system where significant wealth goes untaxed. For more details, refer to the original analysis by Bloomberg Tax.