IRS to Revoke the Partnership “Basis Shifting” | Meaden & Moore

In January 2025, the IRS published final regulations that change the reporting requirements for related party “basis shifting” transactions, which refers to the change of an asset’s cost basis in a related party transaction involving distributions of partnership property or transfers of partnership interest. The regulations require taxpayers and their advisors to:

1. Report current transactions that have basis shifting that exceeds $10 million, and
2. Report any transaction from the last six years that had basis shifting that exceeded $25 million.

The American Institute of CPAs (AICPA) is urging the Treasury Department and the IRS to revoke this new rule.

Why did the AICPA push back?

The AICPA has been staunchly opposed to these regulations since they were first proposed last summer. In a letter dated October 3, 2024, the AICPA asked the IRS to do a few things before finalizing the regulations: (1) eliminate the retroactive reporting requirement; (2) revise the scope to exclude more types of transactions; and (3) raise the reporting threshold from $5 million to $50 or $100 million.

While the IRS did raise the reporting threshold from $5 million to $10 million ($25 million for retroactive transactions), most other requirements stayed the same when the regulations were finalized on January 14, 2025. In a letter dated February 21, 2025, the AICPA stated once again that it was against the regulations. The AICPA asked the Treasury Department to revoke them, and if they could not, then to “immediately suspend and then revise them to reduce undue burdens on taxpayers and advisors.” The AICPA cited some of the following concerns:

• Reporting threshold: The AICPA stated that the $10 million current and $25 million retroactive thresholds would “capture routine transactions not solely structured to receive a tax benefit” and continues to advocate for a threshold of up to $100 million.
• Retroactive reporting requirement: The AICPA believes it’s a “harsh administrative burden” to report on six years of transactions at once.
• Deadline for retroactive reporting: The AICPA believes that the 180-day deadline for taxpayers to file their retroactive Forms 8886 is “unreasonably short.”
• Scope: The AICPA believes that the final regulations will capture many routine partnership transactions. It recommends changing the scope to target only transactions that exploit the tax code.
• Administrative burdens for the government: The AICPA notes that it will take years for the IRS to review the retroactively filed reports, and that it would be difficult and time consuming to train personnel to identify abusive transactions.

What can we expect?

The regulations have been unpopular with many tax practitioners who believe that compliance with the rules places excessive hardship on taxpayers and advisors. Now that we are under new administration, the AICPA is hopeful that its argument for reducing the scope of the reporting requirements may be more seriously considered. If there’s any more movement on the new reporting requirements, we’ll let you know.

In the meantime, it’s important that you comply with the requirements. If you have questions regarding the regulations,  contact us today.