IRS Targets Another Major Tax Loophole for Wealthy Individuals The Internal Revenue Service (IRS) has announced a plan to crack down on a significant tax loophole that has allowed wealthy taxpayers to avoid paying their fair share of taxes. The proposed change, known as the “carried interest loophole,” has been a major target of critics who argue that it unfairly benefits hedge fund managers and other investors. What is the Carried Interest Loophole? Carried interest is a form of compensation paid to investment managers that is taxed as capital gains, rather than as ordinary income. This distinction can result in a substantial tax savings for individuals in high-income brackets. Under current law, investment managers can hold carried interest for more than a year and then pay a capital gains tax rate of 20%, which is significantly lower than the ordinary income tax rate of 37%. The IRS’s Proposed Fix The IRS’s plan would treat carried interest as ordinary income for individuals who earn more than $400,000 per year. This means that investment managers would be subject to the higher tax rate on their carried interest income. The change would affect only a small number of taxpayers, but it is estimated to generate billions of dollars in additional revenue for the government. Why is the IRS Targeting This Loophole? The IRS has come under pressure from lawmakers and the public to address tax loopholes that allow wealthy individuals to pay less in taxes than ordinary Americans. The carried interest loophole has been a particular target of criticism because it allows individuals in the financial industry to pay a lower tax rate on their compensation. Potential Impact The proposed change would have a significant impact on investment managers who rely on carried interest as a major source of income. However, it is unlikely to have a major impact on the overall economy or the stock market. Next Steps The IRS’s proposal is still in its early stages and will need to go through a public comment period before it can be finalized. If approved, the change would not take effect until 2023.
The IRS Plans to End Tax Loophole for Wealthy Taxpayers
The IRS Plans to End Tax Loophole for Wealthy Taxpayers
The IRS plans to close a major tax loophole for wealthy taxpayers that could generate more than $50 billion in revenue over the next decade, the U.S. Treasury Department says. The guidance and rulings announced Monday include plans to essentially end “partnership basis shifting” – a process by which a company or individual can move assets between a series of related parties to avoid taxes. Biden administration officials said after reviewing the practice that there is no economic rationale for these transactions, with Deputy Treasury Secretary Wally Adeyemo calling it “really just a shell game.” The officials said the additional IRS funding provided through the Inflation Reduction Act of 2022 had allowed for better oversight and greater awareness of the practice. “These tax shelters allow wealthy taxpayers to avoid paying what they owe,” said IRS Commissioner Danny Werfel. Due to previous years of underfunding, the IRS had cut back on wealthy individuals’ checks and shifting assets between partnerships and corporations became common. The IRS says filings for large pass-through companies used in the guidelines for the type of tax avoidance increased by 70%, from 174,100 in 2010 to 297,400 in 2019. However, audit rates for these companies fell from 3% to 0.1% over the same time frame. The Treasury Department said in a statement announcing the new guidelines that there is an estimated $160 billion gap between what the top 1% of earners are likely to owe in taxes and what they pay. Monday’s announcement is part of the IRS’s ongoing efforts to crack down on high-net-worth tax fraudsters who manipulate the tax code or don’t pay their taxes at all. Initiatives announced over the past year include going after people and companies that improperly deduct personal flights on corporate jets and collecting back taxes from delinquent millionaires. The IRS plans to increase audit rates for companies with assets over $250 million to 22.6% in 2026, from a rate of 8.8% in tax year 2019. It also plans to increase audit rates tenfold for large complex partnerships with assets exceeding $10 million.
How do you know if your tax return is being audited by the IRS?
The chances of you being checked are slim, but here are some signs to look out for: – You receive a letter from the IRS stating that your return has been selected for an audit. – You are contacted by an IRS agent who wants to ask you questions about your return. – The IRS requests additional documentation to support the information on your return.The Internal Revenue Service (IRS) has announced plans to close a major tax loophole that has allowed wealthy individuals and businesses to avoid paying billions of dollars in taxes. The loophole, known as the carried interest loophole, allows investment managers to pay a lower tax rate on their earnings than other types of income. Under the new rules, carried interest will be taxed as ordinary income, which is subject to a higher tax rate. This change is expected to raise an additional $14 billion in revenue over the next decade. The IRS has been under pressure to close the carried interest loophole for years. In 2017, the Tax Cuts and Jobs Act included a provision that would have closed the loophole, but the provision was later repealed. The new rules are expected to be met with resistance from the investment industry. However, the IRS is confident that the changes will be upheld by the courts. The IRS is also taking steps to close other tax loopholes that benefit the wealthy. In recent months, the IRS has announced plans to crack down on abusive tax shelters and to increase enforcement of the estate tax. These efforts are part of a broader effort by the Biden administration to make the tax system fairer. The administration has proposed a number of tax changes that would raise taxes on wealthy individuals and corporations. The IRS’s plan to close the carried interest loophole is a significant step towards making the tax system fairer. The changes will raise billions of dollars in revenue that can be used to fund important programs and services.
