The IRS Just Scrapped 14 Months of Partnership Regs — Retroactively

The IRS just proposed scrapping 14 months of partnership reporting regs - retroactively. As if they never happened.

On Thursday, the IRS released proposed regulations (REG-108921-25) withdrawing the final basis-shifting transaction-of-interest (TOI) rules it issued in January 2025. Those regs required certain partnership related-party basis-adjustment transactions to be reported as TOIs - a type of reportable transaction CPAs and tax advisers had to track and disclose to the IRS.

The problem? Taxpayers and advisers called them "complex and burdensome." Enough people complained that the IRS is now proposing to pull the plug entirely.

What Gets Wiped

The final regs (T.D. 10028, issued Jan. 14, 2025) required partnership basis-shifting transactions to be reported if they met certain thresholds. The IRS had proposed a $5 million basis-increase threshold back in June 2024, but the final regs bumped that to $25 million for pre-2025 tax years and $10 million for 2025 and later.

Despite the higher thresholds, practitioners still found the compliance obligations too complicated. The IRS acknowledged that pushback in the preamble to the new proposed withdrawal regs.

If finalized, the withdrawal would be effective on the date it's published in the Federal Register. But here's the kicker: the IRS intends to make the removal retroactive to Jan. 14, 2025 - the original applicability date of the final regs.

Translation: CPAs and material advisers can treat the final regs "as having never taken effect."

What CPAs Need to Do (Spoiler: Maybe Nothing)

If you've been tracking these TOI reporting requirements for partnership clients since January 2025, you can now stop. The IRS says you may treat the removal as retroactive, meaning any compliance obligations you thought existed since Jan. 14, 2025 are now gone.

The IRS also says taxpayers and advisers can continue relying on Notice 2025-23 (issued in April) until the proposed withdrawal becomes final.

If you've already filed TOI disclosures under the now-withdrawn regs, the IRS hasn't said whether you can "un-file" them or whether they'll be treated as erroneous. Based on the retroactive treatment language, it seems likely no penalties will apply for non-compliance during the Jan. 14, 2025 to present window - but the IRS hasn't explicitly confirmed that yet.

Why This Matters

This is a rare example of the IRS backing off a final regulation because practitioners pushed back hard enough. Usually once final regs hit the Federal Register, they're locked in.

The basis-shifting TOI regs were part of a broader IRS effort to crack down on partnership tax avoidance schemes. But the compliance burden landed on regular partnership clients - PE funds, real estate partnerships, family LPs - not just the abusers the IRS was targeting.

For CPAs with partnership and PE clients, this is a win. You don't have to track another layer of reporting requirements, and you don't have to worry about penalties for missing disclosures over the past 14 months.

But it's also a reminder that the IRS is still actively trying to regulate partnership basis-shifting transactions. This withdrawal doesn't mean the IRS gave up - it just means this particular approach didn't work. Expect future guidance, and expect it to be narrower and more targeted.

What's Next

The IRS is accepting comments on the proposed withdrawal. Once the final regs are published, CPAs can officially treat the Jan. 2025 TOI rules as dead.

Until then, reliance on Notice 2025-23 continues. But realistically, if the withdrawal is retroactive to Jan. 14, 2025, most CPAs can stop worrying about basis-shifting TOI reporting right now.