There’s no bigger headache for companies than being harassed by the Internal Revenue Service. That harassment expanded during the Biden years – particularly after the issuance of vague new rules targeting American’s 4 million partnerships, which are used by business that employ more than 10 million people.
The rules threaten the security of these businesses. President Trump should repeal them immediately.
For decades, the tax rules governing partnerships, and complying with them, were straightforward and predictable. Then the Biden Administration modified the IRS rules on partnerships, which were finalized just days before President Trump took office, as part of its quest for more revenue that could be used to pay for their budget-busting programs.
The partnership rules are riddled with flaws. They are “functioning like the administrative state’s own version of a deep state rebellion,” writes my friend and Unleash Prosperity colleague, Steve Forbes, “slow-walking Trump’s reforms, while punishing Main Street.”
Partnerships are a bedrock of the U.S. economy, as well as a well-established means for private enterprises to deploy capital, make investments, and create jobs. But the Biden administration saw them as a cash cow and targeted a practice known as “basis shifting.”
While technically complex, basis shifting is also entirely legal and has been used by partnerships for decades to adjust the value of their assets during a transaction or transfer.
In April, the Trump administration repealed strict Biden-mandated rules on the reporting of basis-shifting transactions. The next step should be to repeal a rule, 2024-14, which vests IRS agents with enormous authority to decide what constitutes lawful basis shifting.
The ambiguous rule leaves businesses in the dark as to whether they’re in compliance. Not wanting to be harassed by power-hungry IRS agents, they’re sure to curtail the practice.
The Biden assault on partnerships also included a new compliance unit. “Compliance” may sound harmless, but nothing is ever quite what it seems with the IRS.
This unit is no different. It operates independent of existing IRS audit teams in a parallel structure, duplicating various aspects of examining taxpayers’ filings. This creates confusion, with no one sure who is in charge, leading to prolonged audits without direction or resolution.
The compliance unit’s reign of terror has already begun. In October 2024, the IRS boasted of having already “launched examinations of 76 of the largest partnerships with average assets over $10 billion.”
Those IRS examinations – a perfumed word for “audits” – ensnared hedge funds, real estate investment partnerships, and publicly traded partnerships. And the IRS’s work can be highly invasive – it acknowledges that its audits “can take years” – eating up resources that could be used more productively.
While the IRS says it’s focusing on large partnerships, 97 percent of partnerships have 100 employees or fewer, according to an Ernst and Young study prepared for the Small Business & Entrepreneurship Council in 2024. The study also showed that these small businesses generated $1.3 trillion of GDP, while employing 10.6 million workers who earned $779 billion in wages and benefits.
Cracking down on these partnerships could have harmful and far-reaching ripple effects. The SBE Council’s chief economist, Ray Keating, notes that, “Taxes and compliance red tape on partnerships will increase costs in various ways for the Americans at all income levels in terms of their expenditures on core living expenditures.”
If that’s not bad enough, the rules was also written to be retroactive, going back six years. So, a tax structure that may have been perfectly legal in the past could now trigger investigations, fines, and who knows what else. That undermines confidence in the tax code, which is fundamental to maximizing tax collections.
Several U.S. senators have endorsed repeal of the Biden rule, including Marsha Blackburn, John Barrasso, Steve Daines, and James Lankford. Also calling for repeal are twenty members of the tax-writing House Ways and Means Committee.
The Trump administration has enacted pro-growth tax reform. But the benefits of that reform are threatened by this arbitrary Biden rule. Repealing that rule, and the invasive compliance unit set up alongside it, will enable business partnerships to return to the business of investing in America and creating the jobs that drive economic growth and prosperity.
Steve Moore is Chairman and Co-founder of Unleash Prosperity, Club for Growth Founder, WSJ Writer, Former Heritage Foundation Economist.
