Revelations that former Internal Revenue Service (IRS) official, Lois Lerner had conservative and libertarian groups singled out for scrutiny was a dark day. Sadly, political targeting continues at the IRS, despite Lerner being long gone from the agency. The Treasury Department and the IRS are brazenly re-writing the tax code through rulemakings that would allow the administration to confiscate the wealth of their perceived political opponents. These rulemakings also defy existing law and court precedents.
Earlier in the Biden administration, politicians claimed they could raise revenue for the Treasury by funding the IRS to supposedly go after “tax cheats.” When House Democrats were considering the Build Back Better Act (BBBA), Treasury Secretary Janet Yellen wrote a letter of “enthusiastic support” for the funding, claiming the funding would produce a four-fold return on investment. In July 2022, when the Inflation Reduction Act (IRA) passed, Majority Leader Chuck Schumer credited to the IRA roughly $125 billion of deficit reduction from “IRS Tax Enforcement.”
However, the Department of Treasury’s talking points on the matter reflected those of a partisan political campaign, rather than that of an unbiased government agency. According to Deputy Assistant Secretary for Economic Policy, Natasha Sarin, the IRS funding comprised “a set of revenue raisers that will ask the wealthy… to pay their fair share.”
This biased language informs understanding of the current rulemakings. The rules purport to go after “basis-shifting transactions.” This is when a business sells an asset to a third-party. Once that transaction is completed, the “basis” for which that asset is taxed is changed. IRS and Treasury are seeking to outlaw such transactions based on a subjective definition of “partnership.”
These regulations disregard the plain meaning of the tax laws passed by the Congress. According to multinational law firm, Holland and Knight, “Though many basis-shifting transaction comply with the literal requirements of [the law], the IRS believes that such transactions have been inappropriately utilized.” In other words, though these transactions are legal, the IRS plans to subjectively attack businesses nonetheless.
Any action to change the law must come from Congress. The Supreme Court affirmed as much in its recent case, Loper Bright Enterprises v. Raimondo. Further, Sen. Ron Wyden (D-Ore.) described it as “legislative malpractice” if the solution came from the bureaucracy rather than Congress.
While the IRS claims it can circumvent the written law, virtually every other observer says otherwise. Given the vagueness of what the IRS may consider “inappropriate,” it is more than likely that enforcement will be just as subjective. This, once again, opens the door for the administration to target its political opponents.
This is far from hypothetical. Charles Littlejohn, the IRS contractor, got off with a slap on the wrist for illegally leaking sensitive tax documents. Perhaps, he was able to do so, as the Department of Justice described his victims as “thousands of the nation’s wealthiest individuals” to news outlets. The judge who oversaw the case correctly described the Littlejohn’s targeted and politically motivated attack on wealthy taxpayers as “an attack against the US and its legal foundation.” Judge Reyes later expressed shock that the DOJ did not have the will to appropriately prosecute the crime.
The IRS’s recent moves to initiate enforcement actions against perfectly legal transactions sheds light on why Littlejohn was spared for something blatantly illegal. This is more about advancing a partisan agenda than faithfully enforcing the law. At a tax event, Clifford Warren, an IRS official, described the people who would be hit hardest by the rules. He said it would be those “trying to make basis great again.” If Warren’s wording sounds a little too on the nose, it is.
Unfortunately, what was new to the commenting public on June 17, when Treasury released the guidance, was old news to the taxpayers already under assault from increased audit scrutiny. In September 2023, Holly Paz, head of the IRS’s Large Business and International Division, proudly announced IRA funding would be used to target the nation’s partnerships via audits. Paz was also a top deputy to the aforementioned Lerner, during the 2013 IRS targeting scandal.
Instead of duty to law, the IRS has instead become an echo chamber of illegal behavior and abusive tactics. This only further emboldens bad actors to carry out partisan retribution. With Paz’s involvement, the parallels to last decade’s scandals is all the more clear and, sadly, unsurprising. History may not repeat itself to the letter, but it certainly rhymes.
Today’s bureaucrats have made it abundantly clear they plan to exploit whatever vagaries they may see in the law to go after political opponents. However, there is a reason they exist in the “executive” branch of government. They are tasked with executing the law. It may not be what they wish it to be, but any deviation from the current letter of the law is a usurpation of Congress’s legislative authority. As such, Congress has a duty to conduct rigorous oversight of this illegal harassment of American companies conducting their own affairs.
