Trump Administration Halts I.R.S. Crackdown on Major Tax Shelters

The Treasury Department is rolling back efforts to shut down aggressive strategies used by America’s biggest multinational companies and wealthiest people.

The Trump administration is quietly dismantling efforts by the Internal Revenue Service 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 I.R.S. law enforcement efforts, including one aimed at a lucrative tax shelter used by companies like Occidental Petroleum and AT&T.

The I.R.S. crackdown was projected to raise more than $100 billion over 10 years.

In April, the I.R.S. 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 I.R.S. 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 I.R.S. commissioner. “From the standpoint of the integrity of the system, I am concerned about it. It’s politicizing the tax process.”

The I.R.S. 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 I.R.S. 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 I.R.S.,” Mr. Gibbs said. He added, “I don’t find the attack on her to be credible.”

An I.R.S. spokesman 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 I.R.S. 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 I.R.S. 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 I.R.S. examiners and even many experienced tax lawyers.

In 2021, The New York Times reported that a lack of expertise at the I.R.S. 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 I.R.S. 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 I.R.S., 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 I.R.S. lawyers with partnership expertise has left the agency, an unusual mass exodus even for a new administration.

In December, Charles Flint, a former Breitbart News executive and Republican Senate staff member, started a group called the Alliance for IRS Accountability. He has attacked the tax shelter crackdown and the audits of partnerships and called for the suspension of numerous I.R.S. officials — referring to them as members of the deep state. He has also disclosed lobbying Congress. Mr. Flint’s group lists a Houston mailbox facility as its address and appears to have no other employees or offices.

He did not respond to requests for comment.

Mr. Barnes, who also spent 23 years in the tax department of GE, called the lobbying “suspicious” for its failure to defend the underlying deals, instead focusing on technicalities like dates when the proposed regulations would take effect.

“Nobody has stood up and said, ‘These are good transactions,’” he said. “All they are really trying to do is get a window in which these transactions will continue to not be audited.”

One of the companies being examined by the I.R.S. 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 percent that year, compared with the statutory rate of 21 percent.

The transaction is still under I.R.S. review, according to the company’s most recent securities disclosure. An Occidental spokeswoman, Jennifer Brice, declined to comment.

A similar series of transactions used by AT&T was identified in an I.R.S. 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 I.R.S., said an AT&T spokesman, Jim Kimberly. “We are a responsible taxpayer and will continue to cooperate fully with the agency.”

Rebecca Elliott and J. David Goodman contributed reporting. Kitty Bennett contributed research.

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