The U.S. Department of the Treasury and the IRS have introduced a new initiative aimed at closing a significant tax loophole used by large and complex partnerships. This loophole, known as "related party basis shifting," involves businesses trading original purchase prices on assets among different legal entities to manipulate deductions or reduce future gains.

IRS Commissioner Danny Werfel emphasized that these practices allow wealthy taxpayers to evade paying their full tax obligations. After a year of study on the issue, the Treasury and IRS plan to issue proposed regulations to address these transactions. They have also released a revenue ruling that targets related-party partnership transactions lacking economic substance or substantial business purpose.

This initiative is part of broader efforts to enhance tax fairness and increase revenue collection from high-income individuals and large corporations. The Treasury highlighted that pass-through business filings with assets exceeding $10 million surged by 70% from 2010 to 2019, while audit rates for these partnerships plummeted from 3.8% to 0.1% during the same period. This decline in audit rates has contributed to an estimated annual tax gap of $160 billion among the top 1% of taxpayers.

The announcement coincides with efforts by President Joe Biden's administration to bolster IRS funding, aiming to ensure that ultra-wealthy taxpayers comply with tax laws and contribute their fair share. The administration views sustained IRS funding as crucial for enforcing tax compliance and reducing the deficit.

Republicans in Congress have been critical of increased IRS funding, reflecting ongoing debates over the role of government spending and tax enforcement in fiscal policy.