IRS Tax-Time Twists Stir Up Major Changes

As we approach tax season, we see our old pal, the IRS, coming up with final rules and Roth proposals for us to keep tabs on. Recently, the IRS has introduced two major plotlines: the Roth catch-up rule shake-up and a crackdown on basis-shifting transactions.

The Roth Catch-Up Rule—A Twist in Retirement Planning

If your clients are 50 or older, catch-up contributions have likely been their pathway to boosting retirement savings. However, the SECURE 2.0 Act proposal introduces significant changes. Starting in 2026, high earners (those earning $145,000+ annually) will be required to make these contributions as Roth (after-tax) deposits. Although paying taxes upfront may seem burdensome, the long-term benefit for your clients is the promise of tax-free withdrawals.  

For those aged 60-63, there's promising news. Their contribution limits are increasing, allowing them to save more during their golden years. Employers, on the other hand, have some preparation to do—they'll need to update payroll systems and educate their staff to ensure smooth operations. 

This shift aims to balance tax revenue collection with long-term retirement benefits, creating a win-win situation for both the government and retirees. For high earners, the outcome of this proposal should serve as a wake-up call to reconsider their retirement strategies. A public hearing is scheduled for April 7, 2025, where stakeholders can discuss the implications and provide feedback on the proposed regulations.  

Basis Shifting Transactions Under the Spotlight

Partnerships have traditionally utilized related-party transactions to shift the tax basis of property, thereby creating artificial deductions and tax advantages. However, the IRS is cracking down on these practices. Now labeled as “Transactions of Interest” (TOIs), these strategies must adhere to stringent reporting requirements under the rules of IRC Sections 732(b) or (d), 734(b) or 743(b), especially when no corresponding tax is paid. 

Here’s what you need to know: if your partnership reassigns $10 million (or $25 million pre-2025) in basis through tax-free distributions or transfers, you'll attract IRS scrutiny. It’s crucial to disclose these transactions, document them thoroughly, and be prepared to answer questions. 

These regulations aim to curb abusive practices that threaten the integrity of fair taxation. Partnerships engaged in complex schemes to exploit tax benefits are likely to undergo closer examination and could face significant penalties. 

The Fine Print on Retroactive Reporting

Good news for partnerships fearing endless audits: the IRS has limited retroactive reporting to a six-year lookback window. Transactions before this timeframe? Off the hook. This change balances transparency with fairness, reducing unnecessary burdens on taxpayers. 

Even better, taxpayers and advisors now have an extra 90 days to file disclosures for TOIs. It’s a sign of relief in a sea of regulations, giving partnerships some breathing room to comply with the updated requirements. This six-year window ensures fairness while still capturing significant past transactions that might fall under the IRS’s scrutiny. However, Publicly Traded Partnership gets a pass. The IRS recognizes the complexity of these entities and has largely exempted them from the new rules. This carve-out acknowledges the diverse ownership structures of PTPs while keeping the focus on smaller, more targeted cases. 

Charting a New Course—What’s Next?

The IRS isn’t just enforcing rules; they’re setting the stage for a more transparent tax landscape. Whether you’re saving for retirement or navigating partnership regulations, staying informed is the ticket to smoother sailing.  

Looking ahead, these changes reflect a broader push toward accountability and fairness in the tax system. For professionals, this is an opportunity to align strategies with the new rules and avoid pitfalls. For partnerships, it’s a call to adapt and embrace transparency. Stay tuned for more such updates and don't forget to subscribe to our weekly newsletter below!