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IRS taking action on partnerships shifting basis.

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TL;DR:

1. The IRS is cracking down on related party basis shifting by partnerships to prevent tax avoidance.

2. New guidance is being developed to close tax loopholes and stop abusive transactions.

IRS Cracks Down on Related Party Basis Shifting by Partnerships

The Internal Revenue Service is targeting the use of basis shifting between related parties as a way for partnerships to avoid paying taxes. To address this issue, a new unit will be established within the Office of Chief Counsel, along with a pass-through work group in the IRS Large and Business International Division. The IRS and the Department of the Treasury have issued guidance to prevent related-party transactions through basis shifting, which could potentially cost taxpayers over $50 billion over a 10-year period.

The new guidance aims to address complex maneuvers where high-income taxpayers and corporations shift basis from assets that do not generate tax benefits to assets that do, allowing them to avoid taxes without making any meaningful change to their business economics. These basis-shifting transactions are being used increasingly and can be difficult for auditors to detect unless they know what to look for in a tax return.

The IRS plans to issue stricter regulations and penalties for basis-shifting transactions, identifying certain transactions as reportable transactions of interest. These transactions involve creating basis disparities, transferring partnership interests, and claiming basis adjustments under specific Internal Revenue Code sections. The goal is to crack down on promoters who market these tax avoidance strategies and provide greater transparency to spot abusive transactions.

In addition, the IRS is adding more tax experts to its team to address noncompliance involving high-income earners, complex partnerships, and large corporations. By leveraging resources from the Inflation Reduction Act, the IRS aims to increase audits, improve compliance, and prevent tax abuse in the partnership arena.

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