Accounting Today recently reported that the IRS has proposed rolling back Biden-era regulations aimed at curbing the abusive use of basis-shifting transactions by partnerships to reduce tax liabilities.
Background: What are Basis-shifting Transactions
Basis-shifting transactions are tax planning strategies—most commonly used by partnerships—that take advantage of technical tax rules to reallocate the tax basis of assets among related parties. These arrangements can increase the basis of depreciable or saleable assets, allowing taxpayers to reduce taxable income or generate losses without a corresponding economic change, drawing heightened scrutiny from the IRS and triggering “transaction of interest” reporting requirements.
Key aspects of basis shifting include:
- Purpose: To generate artificial tax losses or enhance depreciation deductions, producing tax benefits that may not reflect economic reality.
- Mechanism: Typically involves shifting basis between “inside” assets (owned by the partnership) and “outside” basis (a partner’s interest in the partnership).
- Related parties: Often structured between closely related entities or individuals, such as through partnership interest transfers or property distributions.
- IRS scrutiny: In June 2024, the IRS issued Notice 2024-54 and proposed regulations identifying these arrangements as “transactions of interest,” citing concerns that many lack economic substance.
Last week, the IRS and the Treasury Department issued a notice of proposed rulemaking to remove provisions that classified certain related-party partnership basis adjustment transactions—and similar arrangements—as “transactions of interest,” a category of reportable transactions. The agencies said the change would impact both participants and material advisors involved in these deals.
The move follows earlier efforts to tighten oversight. In June 2024, then-IRS Commissioner Danny Werfel announced a crackdown on basis shifting among related parties, including the creation of a specialized unit within the Office of Chief Counsel to develop guidance and close perceived loopholes. That same month, Treasury and the IRS released proposed rules, which were finalized in January 2025, near the end of the Biden administration, after incorporating public feedback. The American Institute of CPAs was among the groups that raised concerns about the original regulations.
However, the Treasury Department and the IRS have since retreated from those rules following the change in administration. In a recent notice, the agencies acknowledged that taxpayers and their advisors criticized the basis-shifting “transactions of interest” regulations as overly complex and burdensome. After reviewing those concerns, Treasury and the IRS concluded the rules may be appropriate to remove.
In April 2025, the agencies issued Notice 2025-23, signaling their intent to propose eliminating the basis-shifting TOI regulations from the income tax rules. The notice also allows taxpayers and their advisors to rely on that position in the meantime and states that penalties related to such transactions will be waived.
The original enforcement push was expected to generate billions in revenue. When the initiative was announced in 2024, former IRS Commissioner Danny Werfel said the agency had already identified tens of billions of dollars in deductions tied to these transactions under audit. The Treasury also estimated at the time that such practices—spanning multiple industries and taxpayers—could cost more than $50 billion over a decade.
Conclusion
Based on updated analysis of partnership tax return data included in the latest proposed rulemaking, the Treasury Department and the IRS estimate that roughly 10,000 basis adjustments would be reported in the absence of final regulations. The data further suggest that as many as 12,000 basis adjustments each year would exceed the thresholds outlined in the basis-shifting TOI rules, with about 10,000 of those expected to trigger reporting requirements for participants.
