IRS Cracks Down on Business Tax Compliance

Abusive Pass-Through Practices

One of the IRS’s primary enforcement targets is abusive practices involving pass-through entities, such as partnerships and S corporations. Despite a surge in tax filings for these entities—up by 70% since 2010—the audit rate has dramatically decreased from nearly 4% in 2010 to just 0.1% in 2019. To address this oversight, the IRS is establishing a new office dedicated to overseeing partnerships, S corporations, and trusts and estates. Additionally, a specialized workgroup within the Large Business and International Division will focus on complex partnerships.

The IRS has introduced a new regulatory initiative aimed at curbing “basis-shifting,” a strategy used by large partnerships to manipulate tax deductions. Basis-shifting involves moving tax basis from non-deductible assets, such as stock or land, to deductible assets, such as equipment, thereby reducing taxable income. To combat this, the IRS plans to issue regulations that will:

• Eliminate inappropriate tax benefits arising from basis-shifting between related parties.
• Prohibit basis-shifting among members of a consolidated group.

Proposed regulations released in June 2024 will require reporting of certain basis-shifting transactions. Additionally, a Revenue Ruling has indicated that some related-party transactions involving basis-shifting lack economic substance, signaling the IRS’s intent to challenge these transactions.

Improper Employee Retention Tax Credit Claims

In response to widespread misuse, the IRS has intensified its scrutiny of ERTC claims. Announced in July 2023, this crackdown includes heightened audits and criminal investigations of both claimants and promoters of dubious claims. In September 2023, the IRS imposed a moratorium on processing claims submitted after September 14, 2023, to address the flood of fraudulent claims.

This review of over 1 million ERTC claims, totaling more than $86 billion, revealed that 10% to 20% of claims were clearly erroneous, while 60% to 70% showed a high level of risk. The IRS is denying tens of thousands of clearly erroneous claims and performing further analysis on high-risk claims. Businesses with unprocessed claims may benefit from the IRS’s Withdrawal Program, which allows them to retract claims without facing repayment liabilities, penalties, or interest. Additionally, the IRS may reopen its Voluntary Disclosure Program for employers who claimed the credit improperly.

Personal Use of Corporate Jets

The IRS has also launched a new audit initiative targeting the personal use of corporate aircraft. Following the generous bonus depreciation provisions of the Tax Cuts and Jobs Act, many businesses acquired corporate jets, leading to complex tax implications when these jets are used for personal purposes.

Businesses can deduct expenses related to corporate jets used for business, including depreciation, pilot wages, interest, insurance, and hangar fees. However, when jets are used personally by executives, shareholders, or their families, it complicates the tax treatment and can result in income inclusion for the individuals involved. The IRS’s audit initiative will focus on ensuring proper allocation of aircraft use between business and personal purposes. Although the initial plan includes a limited number of audits, the scope may expand based on findings and the addition of more examiners.

Protect Yourself

With the IRS’s enhanced enforcement efforts, it is crucial for businesses to ensure compliance and avoid costly mistakes. We can assist businesses in navigating these complex regulations while minimizing tax liabilities and avoiding pitfalls. Contact a Brady Ware tax advisor to stay informed and ensure your tax practices align with the latest requirements.