AICPA Pushes Back on IRS’s Basis-Shifting Move

When the IRS and Treasury released their new guidance on basis-shifting transactions on June 17, 2024, for partnerships, the goal was clear: curb tax avoidance in complex transactions involving related parties. But here’s the challenge—these rules, while targeting aggressive tax tactics, could end up impacting genuine, everyday business transactions. The AICPA (American Institute of CPAs) has stepped up, offering practical solutions to keep honest businesses from getting tangled in a compliance maze. Representing over 400,000 members worldwide—spanning business, public practice, government, and education—the AICPA is well-known for setting industry standards and advocating for CPAs. Their latest proposal focuses on simplifying compliance and supporting businesses that play by the rules. 

The recent Supreme Court decision overturning “Chevron deference” means courts are no longer bound to follow agency interpretations of statutes automatically. With that in mind, the AICPA questions whether the IRS and Treasury have the authority to interpret specific tax code sections like 732, 734(b), 743(b), and 755 under the new guidance package. So, what’s the deal? This package, which includes Notice 2024-54 and Revenue Ruling 2024-14, aims to regulate basis-shifting transactions in partnerships but might need a rethink without Chevron to back it up. 

Don’t Go Retro on Us! 

Think about it: you sign a contract with a clear conscience, only to be told years later that new rules make your past actions a problem. That’s exactly what’s happening here. The IRS wants to apply these rules retroactively, which would mean partnerships could face penalties for transactions that happened years ago—without any warning. 

AICPA’s Take: Make the rules apply only moving forward.  Expecting businesses to comply with rules that didn’t exist when they signed on the dotted line? Not exactly fair. But if Treasury insists on going retro, a longer reporting period would at least give businesses a fair shot at adjusting. 

The $5 Million Headache: Raise the Bar! 

The new rule says that partnerships with basis adjustments over $5 million have to report them as potential “transactions of interest.” But here’s the kicker: $5 million may sound big, but it’s really not—especially for large partnerships. At this level, lots of legitimate businesses would get caught in the compliance net. 

AICPA Suggestion: Set a higher threshold, like $50 million (or even $100 million). This way, only those with potentially significant tax impact get flagged, not everyone managing regular, above-board business transactions. 

Trim the Red Tape on Routine Transactions and Related Parties 

Not every basis adjustment is a tax dodge. Partnerships often restructure or merge, leading to basis adjustments as part of routine business. Under current IRS guidance, even these everyday transactions could be flagged, creating red tape and unnecessary reporting burdens. Then there’s the “related parties” issue. The IRS’s broad definition casts a wide net, capturing distributions between minor related parties with no real tax abuse potential.

AICPA Recommendation: Keep the focus on transactions that clearly aim to manipulate tax benefits and allow normal business activities to proceed without extra compliance work. Tighten the related-party definition to include only those with at least 80% ownership interest. This change would target transactions with actual tax manipulation risks, while routine deals remain unaffected. 

Top Compliance Challenges for CPAs and Clients

This recommendation highlights a crucial balance: the IRS’s mission to stop abusive tax strategies should not come at the expense of regular business operations. If the guidance remains unchanged, CPAs and clients may encounter several challenges in ensuring compliance 

• Increased Compliance Burden: Retroactive rules on basis-shifting transactions could require CPAs to gather extensive historical data, adding a major compliance burden. 
• Documentation Challenges: Clients may struggle to find past transaction records, especially from former providers, complicating compliance for CPAs. 
• Administrative Complexity: New reporting requirements, such as TOI disclosures, mean CPAs might need to complete additional forms for clients and advisors. 
• Client Cost Implications: Expanded documentation requirements could raise compliance costs, impacting clients' routine partnership transactions. 
• Audit Vigilance: With the IRS boosting partnership audits, CPAs and clients must ensure compliance for both past and present transactions to avoid scrutiny. 

Clear, focused rules allow partnerships to operate without excessive compliance costs while ensuring the IRS meets its goal of tackling aggressive tax avoidance. If you’re ready to dive deeper, click here for the full AICPA recommendations. And be sure to catch our latest posts for more updates that keep you ahead of the game on important regulatory changes! And subscribe for a weekly rundown, tailored for today’s professionals on the go, delivered right to you.