Bridging the Gap: US Treasury and IRS Target ‘Opaque’ Business Structures to Close Tax Loophole

In an effort to close a tax loophole used by the uber-wealthy, the US Treasury and IRS have announced plans to target ‘opaque’ business structures that inflate deductions. The proposed regulations aim to generate $50 billion in new tax revenues by cracking down on related party basis shifting transactions that shift taxable basis between legal entities to maximize deductions, contributing to a $160 billion annual tax gap among the top 1% of filers.

Filings from pass-through businesses with more than $10 million in assets have increased significantly in recent years, while audits have decreased. To address this issue, the agencies have conducted a year of research and proposed new rules to increase reporting for basis-shifting transactions and challenge certain transactions lacking economic substance.

Treasury Secretary Janet Yellen emphasized that the agencies are focused on addressing high-end tax abuse from all angles, with resources from President Biden’s Inflation Reduction Act helping combat long-standing abuses. The agencies will review public comments before finalizing the new rules.