On February 19, 2025, President Donald Trump issued Executive Order 14219, titled “Ensuring Lawful Governance and Implementing the President’s ‘Department of Government Efficiency’ Deregulatory Initiative.” The primary purpose of Executive Order 14219 is to direct federal agencies to review and rescind regulations that are deemed unconstitutional or that undermine national interests. The Executive Order also emphasizes the efficient use of the executive branch’s limited enforcement resources. The “limited enforcement resources” is particularly imp
In response to Executive Order 14219, the Department of the Treasury and the Internal Revenue Service (IRS) issued IRS Notice 2025-23. This notice announces the intent to remove the regulations related to certain basis shifting actions that imposed reporting obligations and potential penalties. The notice also withdraws IRS Notice 2024-54, which had outlined new proposed regulations addressing partnership related-party basis shifting transactions that will now, presumably, never occur.
I previously wrote on whether Biden administration partnership enforcement initiatives would continue under the Trump administration. The IRS, of course, will need to continue monitoring partnership transactions for potential tax abuse. The removal of existing regulations and IRS Notice suggesting additional partnership regulations may not imply a relaxation of enforcement efforts, but it does signify a shift in the partnership tax enforcement priorities. Taxpayers and their advisors will need to rely on remaining guidance on partnership tax issues and, because of restrictions on new regulations, may not have the benefit of additional guidance on the change in enforcement methods and priorities.
Enforcement Priorities Under Biden Administration
The final regulations on basis shifting transactions and IRS Notice 2024-54 targeted specific types of partnership transactions and related-party transactions that were seen by the IRS as abusive and aimed at tax avoidance. The regulations sought to address transactions that resulted in artificial increases to the basis of property, thereby generating tax benefits without corresponding economic outlay. IRS Notice 2024-54 announced the Treasury Department and IRS’s intent to issue additional proposed regulations targeting partnership basis-shifting transactions among related parties also seeking to prevent tax avoidance through manipulation of basis adjustments.
The Biden administration regulations, now removed, required material advisors and participants in these transactions to disclose them to the IRS in an effort to enhance transparency and help the IRS detect, monitor, and challenge potentially abusive tax strategies. The regulations also imposed penalties for non-disclosure. These regulations faced significant criticism for being overly complex, burdensome, and retroactive. Interested parties argued that the regulations imposed costly compliance obligations and created uncertainty for businesses engaged in ordinary-course and tax-compliant activities. However, proponents of the regulations alleged that they dealt with a real problem of certain partnerships exploiting basis adjustment provisions under the Internal Revenue Code to create inappropriate or artificial increases in the basis of partnership property. For example, some adjustments seen by the IRS would increase depreciation deductions or reduce taxable gains without corresponding economic outlays or changes in economic ownership.
The removal of IRS Notice 2024-54, means that the anticipated additional proposed regulations will never be issued. Although the proposed regulations were never issued, they were anticipated to provide the detail on the issues identified to taxpayers and their advisors so that they had both notice of the IRS views and could comment on the proposed regulations. According to the IRS Notice, the transactions at issue typically involved partners and their related parties orchestrating distributions or transfers of partnership property or interests in a manner that generates increased cost recovery allowances (such as depreciation or amortization) or reduces taxable gain (or increases loss) upon the sale or disposition of the property. The IRS claimed such transactions would not occur between unrelated parties acting at arm’s length and allowed related parties to manipulate basis and obtain significant allegedly improper tax benefits. The proposed regulations anticipated by the IRS Notice were an attempt to close loopholes allowing the alleged fictitious and/or unjustified basis increases among related parties. Perhaps the IRS, regardless of administration change, will continue assert that the identified transactions are improper but there is no indication that different proposed regulations would be forthcoming to provide the details to allow taxpayers and their advisors to review, comment, and provide advice to clients on compliance. Further, under Executive Order 14192, any such proposed regulation would now require the elimination of 10 existing regulations such that providing such detail could be overly cumbersome with existing and or future resources at the IRS. Therefore, enforcement of partnership tax abuses may continue, but it will likely occur without significant guidance to professionals advising clients on compliance.
What Partnership Tax Enforcement Rules Remain?
Although the recent partnership tax enforcement regulations and IRS Notice were withdrawn, the IRS still has tools it can rely on to ensure compliance with the tax laws by partnerships. The primary tool is the Bipartisan Budget Act (BBA) of 2015 which introduced a centralized partnership audit regime that significantly streamlines the audit process and enhances the IRS’s enforcement capabilities. The BBA audit regime centralizes examinations and adjustments at the partnership level, introduces the concept of imputed underpayment, and provides modification procedures. It also enhances IRS enforcement efforts by ensuring consistent treatment of partnership-related items, enabling push-out elections, strengthening provisions to prevent abuse, and attempts to maintain flexibility in procedures the partnership structure allows. These measures collectively are designed to improve the efficiency and effectiveness of IRS audits and enforcement actions. The implementation of these new rules are not without criticism and the first disputes over the audit procedures are making their way to the courts for decision. In short, it will likely be several years before both the IRS, taxpayers and their advisors have a comfortable understanding of the interpretation and implementation of these new rules.
Any partnership audit regime, however, is only effective if the right partnerships are chosen for audit and a sufficient number are chosen to effectively identify common issues where the IRS and taxpayers disagree. Historically, the IRS has struggled to audit partnerships. When the IRS released its Strategic Operating Plan in May of 2024 it indicated increasing audits for wealthy taxpayers, large corporations, and partnerships. That announcement indicated a “ten-fold” increase for large complex partnerships but that increase would only be from 0.1% in 2019 to 1% by 2026. A U.S. General Accountability Office (GAO) study indicated that large partnerships in the United States increased 600% between 2002 and 2019 but the audit rate continued to decline. Therefore, this popular entity structure increases while audits continue to decline. The IRS blamed the declining audit rate to resource constraints. Further, the no-change results for the few partnerships audited are double those for large corporate taxpayers and the GAO study attributes the poor selection to statistical models used. This seems to indicate that even the few partnerships that are chosen for audit are not uncovering the right issues and disagreements in tax treatment of audited items such that clarity is achieved by either the IRS or the taxpayers.
Complicating matters is personnel reductions at the IRS. As other authors have reported, the IRS has faced and will continue to face cuts in personnel as part of President Donald Trump’s promise to reduce the size of the federal government. The IRS has already lost thousands of employees through terminations and other reductions in force that have removed both leadership, senior IRS personnel and other IRS employees within the IRS. Despite these losses, the Trump administration has signaled more reductions are anticipated following the recent tax filing deadline. Therefore, if partnership audits are going to be the main enforcement mechanism going forward, it is not yet known how many IRS employees will be left to conduct those audits and how that reduced staff will impact the amount and efficiency of those audits.
Conclusion
Executive Order 14219 has forced all agencies, including the IRS, to reconsider the regulations currently on the books to ensure they are lawful, reduce compliance burdens, and still focus on enforcement efforts covered by applicable statutes. The recent IRS Notice 2024-54 could signal additional removal of regulations currently used by taxpayers and their advisors. Given the restrictions on issuing new regulations guidance appears likely to be removed but not replaced. While the removal of these regulations, and potentially others, provides immediate relief for taxpayers, tax avoidance schemes must still be found and challenged to protect the integrity of the tax system. The future of partnership tax enforcement must balance reducing unnecessary regulatory burdens with continued enforcement to ensure compliance with tax laws.
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