Will Trump’s Treasury Department Continue Partnership Tax Focus?

IRS Shifts Focus on Partnerships in 2024

In 2024, the IRS intensified its scrutiny on partnerships, driven by various actions initiated before President Trump’s administration. However, with the appointment of a new Treasury Secretary, Scott Bessent, and the nomination of a new IRS Commissioner, Billy Long, coupled with federal funding cuts, a hiring freeze, and staff reductions at both the IRS and the Department of Justice Tax Division, these initiatives may lose momentum. The new administration’s focus on reducing government size and regulation might further hinder the IRS’s ability to enforce partnership tax compliance effectively.

The Double-Edged Sword of Partnership Taxation

Partnerships offer businesses the flexibility to structure complex deals, fostering economic activity. However, this flexibility can be exploited for tax avoidance, making partnerships a common target in IRS audits. The author reflects on their experience at the DOJ, noting the prevalence of abusive partnership transactions, while also acknowledging the legitimate use of partnerships in intricate business deals. The line between abusive and legitimate transactions often hinges on intricate details, highlighting the need for careful scrutiny.

Challenges in Auditing Partnerships

Historically, the IRS has struggled with auditing partnerships. Despite plans to increase audits, the proposed ten-fold increase from 0.1% in 2019 to 1% by 2026 seems modest, especially given the 600% growth in large partnerships between 2002 and 2019. Resource constraints and ineffective audit selection processes have led to poor audit outcomes, disproportionately affecting compliant partnerships with unnecessary audits. This inefficiency not only burdens taxpayers but also undermines public trust in the tax system.

New Partnership Audit Rules Under the Bipartisan Budget Act

The Bipartisan Budget Act introduced new audit rules starting in 2018, aimed at improving the IRS’s ability to audit partnerships. While tax advisors have helped partnerships adapt, challenges have emerged, particularly with the single partnership representative rule, which can disadvantage minority partners. Litigation is on the rise to resolve these issues, but reduced funding for the IRS and DOJ may lead to selective enforcement, leaving some taxpayers without clear guidance and others facing legal challenges.

Focus on Basis Shifting Transactions

Pre-Trump administration, the IRS targeted basis shifting transactions, such as related-party transfers and distributions, deemed abusive. Guidance and proposed regulations, including Revenue Rulings and IRS notices, aimed to curb these practices. However, the Trump administration’s deregulation push, exemplified by the "Unleashing Prosperity Through Deregulation" executive order, has likely stalled these regulations, reducing the IRS’s enforcement capabilities.

The Impact of Deregulation and Reduced Resources

The current regulatory environment, marked by funding cuts and staff reductions, signals a decline in IRS and DOJ enforcement capabilities. The "large-scale reductions in force" under Trump’s executive order further diminish resources for partnership enforcement. While the IRS issued threats in 2024, the ability to enforce them in 2025 is waning. This raises concerns about potential tax abuse, though the actual impact remains to be seen, leaving the future of partnership tax enforcement uncertain.

In conclusion, the IRS’s capacity to regulate partnerships is diminishing under the new administration’s policies, potentially leading to unchecked tax strategies and a gap in enforcement.