Trump administration halts IRS crackdown on major tax shelters
- The San Juan Daily Star
- 1 day ago
- 4 min read
By JESSE DRUCKER
The Trump administration is quietly dismantling efforts by the IRS to shut down a slew of aggressive tax shelters used by America’s biggest multinational companies and wealthiest people.
The administration, bowing to pressure from industry groups, right-wing activists and congressional Republicans, is quickly rolling back several IRS law enforcement efforts, including one aimed at a lucrative tax shelter used by companies such as Occidental Petroleum and AT&T.
The IRS crackdown was projected to raise more than $100 billion over 10 years.
In April, the IRS said it would rescind Biden administration rules that had required companies using such tax strategies to report them to the agency, a change making it more difficult for auditors to find the transactions. The agency also eased a pair of rules that target abusive shelters, including one that imposes penalties on wealthy Americans who used an insurance tax scheme that multiple courts have tossed out.
In late July, 20 House Republicans asked the IRS to withdraw yet another line of attack on the transactions, one providing guidance to auditors on how to analyze the tax shelter deals.
That letter was “an attempt by elected officials to influence audits by the Internal Revenue Service of specific taxpayers,” said Larry Gibbs, who served as President Ronald Reagan’s IRS commissioner. “From the standpoint of the integrity of the system, I am concerned about it. It’s politicizing the tax process.”
The IRS is also turning on its own staff. Over the past several months, right-wing groups targeted the agency, accusing officials involved in the anti-tax-shelter efforts of being members of a “deep state” and biased against Republicans. The IRS suspended several employees, including some who worked on the crackdowns. The highest-level official, Holly Paz, is a longtime, respected agency official who ran the division that oversees large business and was placed on leave in late July.
“Based on my experience with Holly Paz, over a number of years, she is experienced, she is professional and she has been a leader at the IRS,” Gibbs said. He added, “I don’t find the attack on her to be credible.”
An IRS spokesperson did not respond to a series of questions.
A Treasury official said the department “withdrew the Biden administration’s guidance because it would have imposed enormous and retroactive compliance burdens on many ordinary, legitimate business transactions and honest taxpayers.”
Beginning in 2022, the Treasury and IRS began to express concerns about a potentially abusive transaction known as “basis shifting.”
The details are complex, but at their heart, they can work like this: Companies that buy expensive equipment often take gradual tax deductions equal to the cost, because of something called “depreciation.” Federal tax rules permit those deductions because, in theory, the equipment becomes less valuable each year.
For example, oil companies typically can take depreciation deductions for much of the expensive equipment they buy to construct and operate their wells. Those deductions in turn shield profits from tax. If a company spends, say, $1 billion on steel pipes to line its oil wells, it could deduct nearly $150 million annually for seven years.
But at a certain point, the deductions run out, which may mean the profits generated by the oil wells are no longer sheltered from tax.
The basis shifting transactions targeted by the IRS effectively create a whole new series of deductions from thin air, permitting the companies to start sheltering the profits from tax all over again — without spending any new money.
The deals were promoted by two major accounting firms, Deloitte and EY, people familiar with their activity said.
These schemes are “very aggressive,” said Peter Barnes, a veteran lawyer at Caplin & Drysdale, a Washington, D.C., law firm specializing in taxes. “Some tax advisers are not only pushing the edge but even stepping over it.” He called Treasury’s plans to pull the regulations “very unfortunate.”
The shelters exploit the complex world of partnership tax rules, a subspecialty of the law little understood by IRS examiners and even many experienced tax lawyers.
In 2021, The New York Times reported that a lack of expertise at the IRS meant the agency was largely incapable of auditing large partnerships, like private equity firms, oil and gas enterprises, real estate businesses, and venture capital firms. The IRS soon set up a unit to scrutinize the area.
A variety of groups lobbying to kill the crackdown on basis shifting — which relies on partnerships — also want to eliminate that new audit group. In a letter to the IRS, the National Association of Manufacturers accused the team of “contributing to the overreaching and unduly burdensome administrative state that the current administration is seeking to curtail.” The organization did not defend the underlying deals, but instead criticized the process that led to the crackdown.
Already this year, nearly the entire senior team of IRS lawyers with partnership expertise has left the agency, an unusual mass exodus even for a new administration.
One of the companies being examined by the IRS is Occidental Petroleum. The company, which is based in Houston and one of the country’s biggest oil producers, carried out a reorganization in the wake of its $55 billion acquisition of Anadarko in 2019, making “an adjustment to the tax basis in a portion of its operating assets,” according to securities disclosures.
The transaction helped create a future stream of potential tax deductions totaling nearly $13 billion, according to an analysis of the firm’s filings by Kevin Markle, a tax accounting professor at Michigan State University’s Broad College of Business.
As a result of the moves, in the first quarter of 2022, Occidental reported a tax benefit of $2.7 billion. The transaction helped drive the company’s effective tax rate down to just 6% that year, compared with the statutory rate of 21%.
The transaction is still under IRS review, according to the company’s most recent securities disclosure. An Occidental spokesperson, Jennifer Brice, declined to comment.
A similar series of transactions used by AT&T was identified in an IRS memorandum, but the company’s name was removed from that filing.
“Like many large companies, we routinely have a number of items under review” by the IRS, said an AT&T spokesperson, Jim Kimberly. “We are a responsible taxpayer and will continue to cooperate fully with the agency.”