The Senate Finance Committee has released a report that outlines six different tax avoidance strategies and some proposed solutions. These tax avoidance strategies will have an estimated cost in the billions over the next decade. The six strategies addressed in the report are the use of collars to defer gain, wash sales to limit recognition of capital income, the use of derivatives to manipulate timing and character, constructive ownership rules relating to derivative contracts referencing partnership interests as the underlying assets, basket options and nonqualified deferred executive compensation.
The committee states that these sophisticated transactions are used by high-income taxpayers to reduce their tax liability by half. According to the committee, these taxpayers often times end up with a lower effective tax rate than people who earn a regular paycheck. The report attacks the tax code’s treatment of derivatives. Specifically, the report says that the tax code is “inefficient and outdated” and allows “taxpayers to elect the timing and character of income.” Unfortunately, the report does not offer much detail regarding the proposed solutions to these issues, but it does state that “the IRS lacks the resources to monitor and audit large partnerships engaging in these strategies.
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