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News

IRS Targets Tax Loopholes in Partnership Transactions with New Rules

By:
Emma Slack-Jorgensen
Published Date:
Jan 14, 2025

On Jan. 10, the IRS and Treasury Department released final regulations that bring certain partnership-related transactions under closer scrutiny by identifying them as “transactions of interest” (TOIs). These transactions, which involve basis adjustments resulting from property distributions or transfers of interests among related parties, are now subject to disclosure requirements for reportable transactions. 

According to a report by Accounting Today, the regulations aim to address potential tax avoidance while incorporating feedback from stakeholders to reduce compliance burdens. The final regulations also highlight the IRS’s commitment to addressing abusive tax practices in partnership structures while balancing the need for fairness and practicality in tax administration. 

The final rules target scenarios where tax-free distributions or transfers result in significant basis increases under IRC Sections 732(b) or (d), 734(b), or 743(b) without corresponding tax liabilities. Such transactions often allow related parties to reduce taxable income or increase deductible losses. The IRS has set specific thresholds for basis increases to qualify as TOIs, raising the threshold to $25 million for transactions occurring before 2025 and $10 million for those after that. By increasing these thresholds, the regulations focus on larger, more impactful transactions, reducing the burden on smaller partnerships, according to Accounting Today.  

The regulations also address feedback from small business and family-run partnerships, based on comments received by the agencies, which expressed concerns about unnecessary administrative burdens. The IRS has made adjustments to reduce compliance obligations for these groups, ensuring the rules are targeted and effective.

To limit retroactive reporting, the IRS has restricted requirements to open tax years within a six-year lookback period, ensuring compliance is manageable. Additionally, taxpayers and material advisors are granted an extra 90 days from the regulations’ Jan. 14 publication date in the Federal Register to submit necessary disclosure statements for past transactions. 

Publicly traded partnerships are generally excluded from these rules, as their ownership structures typically involve a large number of unrelated investors. This exclusion reflects stakeholder concerns about the impracticality of applying disclosure requirements to such entities. 

The regulations also address feedback from small business and family-run partnerships, which expressed concerns about unnecessary administrative burdens. The IRS has made adjustments to reduce compliance obligations for these groups, ensuring the rules are targeted and effective.