In the Fact Sheet 2024-21 Basis shifting, the IRS detailed the guidance to avoid abusive basis shifting by related-party partnership members, such as transfers, distributions or liquidations. This is part of a broader targeted effort against partnerships and high income taxpayers.
For the basis shifting, the IRS described the abuse as a evasion of taxes (no economic consequence) by using higher depreciation “… these transactions may employ several steps over a period of years and use sophisticated tax technology to ensure that little or no tax is paid while large amounts of tax basis is “stripped” from certain assets and shifted to other assets to generate tax benefits. In essence, these deals allow increased depreciation deductions or reduced gain on the sale of an asset with little or no substantive economic consequence.:
In the IR-2024-166, the IRS provides more details on the tax recovery on implementing these measures in partnerships ($50b in 10 year period), on how the audit rates for partnerships with over $10m in assets had a rate of 0.1% in 2019 and these filings have increased significantly in the last few years and on the current steps like launching audits .
“…Treasury estimates these abusive transactions, which cut across a wide variety of industries and individuals, could potentially cost taxpayers more than $50 billion over a 10-year period.”
“… During the past decade, IRS budget cuts have made it harder for the agency to focus compliance resources on partnerships. Tax filings from passthrough businesses with more than $10 million in assets jumped to nearly 300,000 filings in 2019, 70% more than 2010. At the same time, audit rates fell from 3.8% in 2010 to 0.1% in 2019.”
“… The IRS has already announced a series of steps to improve compliance involving high-income individuals and partnerships, including launching audits on 76 of the largest partnerships with average assets over $10 billion that includes hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and many other industries. The IRS announced today that these complex audits are proceeding and in various stages of the process. These audits can take years depending on the size and complexity of the partnerships.”
Due to the increase scrutiny in partnership returns, including higher audit rates in the near future, we would recommend to review the current structure and operating agreement, selection of the tax representative partner, basis values for members, and ensure full compliance of the partnership.
Link IRS – New IRS, Treasury guidance focuses on “basis shifting” transactions used by partnerships
Link Journal of Accountancy – IRS moves to end ‘shell game’ of basis-shifting transactions
