NYT (“Trump Administration Halts I.R.S. Crackdown on Major Tax Shelters“):
The Trump administration is quietly dismantling efforts by the Internal Revenue Service to shut down a slew of aggressive tax shelters used by America’s biggest multinational companies and wealthiest people.
The administration, bowing to pressure from industry groups, right-wing activists and congressional Republicans, is quickly rolling back several I.R.S. law enforcement efforts, including one aimed at a lucrative tax shelter used by companies like Occidental Petroleum and AT&T.
The I.R.S. crackdown was projected to raise more than $100 billion over 10 years.
In April, the I.R.S. said it would rescind Biden administration rules that had required companies using such tax strategies to report them to the agency, a change making it more difficult for auditors to find the transactions. The agency also eased a pair of rules that target abusive shelters, including one that imposes penalties on wealthy Americans who used an insurance tax scheme that multiple courts have tossed out.
In late July, 20 House Republicans asked the I.R.S. to withdraw yet another line of attack on the transactions, one providing guidance to auditors on how to analyze the tax shelter deals.
At first blush, this very much looks like a giveaway to wealthy donors. Certainly, it flies in the face of President Trump’s stated goal of lowering the deficit.
Their explanation is not super helpful:
A Treasury official said the department “withdrew the Biden administration’s guidance because it would have imposed enormous and retroactive compliance burdens on many ordinary, legitimate business transactions and honest taxpayers.”
The background, alas, is sufficiently complicated that it far exceeds my rudimentary understanding of business accounting:
Beginning in 2022, the Treasury and I.R.S. began to express concerns about a potentially abusive transaction known as “basis shifting.”
The details are complex, but at their heart, they can work like this: Companies that buy expensive equipment often take gradual tax deductions equal to the cost, because of something called “depreciation.” Federal tax rules permit those deductions because, in theory, the equipment becomes less valuable each year.
For example, oil companies typically can take depreciation deductions for much of the expensive equipment they buy to construct and operate their wells. Those deductions in turn shield profits from tax. If a company spends, say, $1 billion on steel pipes to line its oil wells, it could deduct nearly $150 million annually for seven years.
But at a certain point, the deductions run out, which may mean the profits generated by the oil wells are no longer sheltered from tax.
The basis shifting transactions targeted by the I.R.S. effectively create a whole new series of deductions from thin air, permitting the companies to start sheltering the profits from tax all over again — without spending any new money.
The deals were promoted by two major accounting firms, Deloitte and EY, people familiar with their activity said.
These schemes are “very aggressive,” said Peter Barnes, a veteran lawyer at Caplin & Drysdale, a Washington, D.C., law firm specializing in taxes. “Some tax advisers are not only pushing the edge but even stepping over it.” He called Treasury’s plans to pull the regulations “very unfortunate.”
The shelters exploit the complex world of partnership tax rules, a subspecialty of the law little understood by I.R.S. examiners and even many experienced tax lawyers.
In 2021, The New York Times reported that a lack of expertise at the I.R.S. meant the agency was largely incapable of auditing large partnerships, like private equity firms, oil and gas enterprises, real estate businesses, and venture capital firms. The I.R.S. soon set up a unit to scrutinize the area.
A variety of groups lobbying to kill the crackdown on basis shifting — which relies on partnerships — also want to eliminate that new audit group. In a letter to the I.R.S., the National Association of Manufacturers accused the team of “contributing to the overreaching and unduly burdensome administrative state that the current administration is seeking to curtail.” The organization did not defend the underlying deals, but instead criticized the process that led to the crackdown.
That the wealthy and, especially, huge corporations can hire better accountants (including those who were top IRS auditors) than the government is well-documented. The upshot is that it’s simply easier for the IRS to target those with less resources, allowing much more quick returns, that spending years and enormous resources fighting the biggest offenders. That the same folks have the resources to lobby to shape the tax code to begin with, of course, skews the picture further.
