Treasury’s Fight to End Businesses Tax Loopholes Just Got Harder

America’s tax system is full of loopholes and, according to the Treasury Department, partnerships are exploiting one of the biggest by trading “basis” like baseball cards.

Basis is the taxpayer’s elixir—the more you have, the less you owe. The Treasury argues that basis shifting without economic purpose is against congressional intent. It wants to recoup tens of billions of dollars in lost revenue while creating a fairer, more progressive system. But stopping partnership basis shifting is an uphill battle.

Some might paint the Treasury’s agenda as a case of government beating up business, but this isn’t true. With Congress working to curb IRS funding, and the US Supreme Court’s June decision to limit what agencies regulate, the IRS isn’t well-positioned to take on the tax bar.

Regulations, Audits, Compliance

The Treasury wants partnerships to save basis for transactions that have economic consequences through more regulations, more audits of large partnerships and wealthy people, and greater compliance from education and fear tactics.

It argues that if the high-income individuals and companies that report less than 50% of their income matched working people’s 99% compliance rate on wages, then:

• The government would raise $700 billion more in taxes
• The tax system would become more progressive
• Income and wealth disparities would shrink

These are great promises, but there are reasons to bet against the Treasury’s plans to rein in the wealthy.

It must get past Congress when it comes to audits. It hasn’t succeeded for the past 15 years as Congress (until recently) has slashed the IRS’s budget—to the benefit of large businesses and wealthy individuals and to the detriment of working people.

Congress chopped the IRS budget by almost 20% from 2010 to 2021. As the number of tax returns rose by 7%, congressional cuts forced a reduction in IRS staff by 22%, with enforcement staff dropping by over 30%. Since 2010, audits on millionaires have plummeted by more than 70%, while audits on the poor have jumped.

And as the IRS now tries to rebuild with the assistance of $80 billion in funding from the Inflation Reduction Act, Congress continues to work to take the money back.

For decades, the Chevron doctrine shielded agency regulations from undue judicial interference. Chevron allowed government agencies, including the Treasury, to implement crucial regulations that helped enforce federal law. Now the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo leaves any regulation open to challenge and judicial scrutiny.

The shift, coupled with the well-documented financial ties between some Supreme Court justices and wealthy individuals, raises serious concerns that the IRS is targeting its regulations at billionaires and billionaires are feting the people who can kill those regulations, Can we expect this Supreme Court to uphold regulations that hurt their benefactors?

The tax bar isn’t easily scared when it comes to compliance, though—they say the Treasury needs an education.

Even before the Supreme Court repealed the Chevron doctrine, tax professionals were promising a fight on proposed partnership regulations. Now that the court has stripped administrative agencies of some of their regulatory power, the tax bar is betting that their clients are safe.

Goliath Will Win

My bet is that this is the wrong time and place for the Treasury’s attempts to rein in partnerships—David won’t win this battle.

That is a pity because it means either deficits or tax increases for most of us while the wealthy can avoid the tax that they owe—and they owe a lot. The gap between what taxpayers owe the government and what they pay continues to grow. In 2021, the projected net tax gap reached $625 billion.

Pass-through entities such as partnerships have the biggest gaps between their true income and what they report because pass-through businesses generate money that’s not easy to track. While wages require a third party to issue a W-2 form, and banks must issue 1099s on interest payments, there often is no third party required to report payments to pass-through businesses.

Housing every homeless person in the US would cost less than $30 billion each year. Depending on the program, providing universal free college would cost from $28 billion to $75 billion. Ending hunger would cost $25 billion.

Homelessness, hunger, and crippling college debt could all disappear with hundreds of billions of dollars left over to tackle other social ills. But our representatives would rather make sure that the IRS can’t collect taxes from people who owe the money and our jurists would rather constrict the IRS then let it do its job.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

US taxation and development expert Beverly Moran is professor emerita at Vanderbilt University, senior fellow at the Roosevelt Institute, and senior tax fellow at Boston College Law School.

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