IRS proposes to remove rules against basis-shifting transactions

The Internal Revenue Service has proposed removing regulations from the Biden administration that tried to crack down on the abusive use of basis-shifting transactions by partnerships as a way of minimizing taxes.

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Last week, the IRS and the Treasury Department posted a notice of proposed rulemaking to remove regulations identifying certain partnership related-party basis adjustment transactions as well as substantially similar transactions as transactions of interest, which are a kind of reportable transaction. The IRS and the Treasury noted the regulations would affect participants in these transactions as well as material advisors. 

In June 2024, then-IRS Commissioner Danny Werfel announced the IRS would be targeting the use of basis shifting between related parties as a way for partnerships to avoid paying taxes, setting up a new unit within the Office of Chief Counsel to develop guidance aimed at closing tax loopholes. That month the Treasury and the IRS published a notice of proposed rulemaking and in January 2025, during the waning days of the Biden administration, finalized the basis-shifting TOI regulations with modifications in response to comments. The American Institute of CPAs was among the groups that objected to the initial regulations.

However, the Treasury and the IRS have backed off the regulations since the Trump administration took power. Since the regulations were finalized, the agencies noted in the latest notice that taxpayers and their material advisors have criticized the basis-shifting TOI regulations as imposing complex and burdensome compliance obligations on businesses. The Treasury and the IRS considered these public comments and determined that the regulations may be appropriate for removal.

In April 2025, the Treasury and the IRS published Notice 2025-23 announcing that they intended to publish a notice of proposed rulemaking proposing the removal of the basis-shifting TOI regs from the income tax regulations. The notice also said taxpayers and their material advisors could rely on the notice until the regulations are removed. It also said the IRS would waive the penalties for participants and their advisors in such transactions.

The crackdown was expected to bring in billions of dollars, and at the time it was announced in 2024, Werfel said the IRS had already spotted tens of billions of dollars of deductions claimed in these transactions under audit. The Treasury estimated in 2024 that the 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. 

Based on the new analysis of partnership tax return data in the latest notice of proposed rulemaking, the Treasury and the IRS have estimated that 10,000 basis adjustments would be reported in the absence of the forthcoming final regulations. Tax return data indicate as many as 12,000 basis adjustments will be over the numeric thresholds in the basis-shifting TOI regulations each year. The Treasury and the IRS expect 10,000 of the 12,000 basis adjustments to generate reporting by participants.