The I.R.S. Tried to Stop This Tax Dodge. Scott Bessent Used It Anyway.

Wall‑Street Tax Strategies Meet Government Oversight

For years, high‑earning professionals on Wall Street have turned to limited partnerships as a way to sidestep the Medicare surtax embedded in the Affordable Care Act. By funneling a portion of their compensation through a partnership that distributes income as “self‑employment earnings,” they can legally reduce the amount of wages subject to the 2.9 % Medicare tax.

“It’s a perfectly legitimate structure,” says tax‑law expert David Larkin. “The IRS has known about it for a decade, but enforcement has been sporadic at best.”

Scott Bessent’s Double Role

Scott Bessnet, a former hedge‑fund strategist who rose to become Treasury Secretary under the current administration, was not immune to the practice. In 2019, documents obtained by The Wall Street Journal showed that Bessnet’s personal wealth was partially held in a limited partnership that generated a significant Medicare‑tax savings each year.

Fast forward to 2024, and Bessnet now heads the Internal Revenue Service. His new position places him at the forefront of the very crackdown his own tax planning once benefited from.

IRS Action Against the Partnership Loophole

Earlier this year, the IRS issued a notice of proposed rulemaking aimed at tightening the definition of “employee compensation” for partnership distributions. The agency argues that the current rules create an “unfair advantage” for high‑income earners who can reclassify wages as partnership income.

The proposed changes would:

• Require partnerships to report distributions that would otherwise be treated as wages.
• Impose a supplemental Medicare tax on those recharacterized amounts.
• Increase audit focus on limited partnerships with a majority of high‑earning partners.

Conflict of Interest Concerns

Critics have seized on Bessnet’s past use of the very structure the IRS now seeks to eliminate. Senator Maria Torres (D‑CA) questioned the Treasury Secretary during a recent hearing:

“How can the public trust an agency that is led by someone who profited from the loophole we’re now trying to close?”

Bessnet responded that his personal tax arrangements were fully disclosed and complied with all existing laws at the time. He added that his current role is to enforce the law impartially, regardless of his own history.

What This Means for Taxpayers

If the IRS’s proposals become final, the limited‑partnership tax dodge could lose much of its appeal. Financial advisors warn that wealthy individuals may shift to alternative vehicles, such as LLCs or deferred compensation plans, to achieve similar tax outcomes.

For the average taxpayer, the changes are unlikely to have a direct impact, but the broader message is clear: the government is tightening the net around sophisticated tax‑avoidance schemes, even when those schemes have been used by the very officials now tasked with enforcing them.

Looking Ahead

The IRS plans to open a comment period on the proposed rulemaking next month, inviting input from tax professionals, corporations, and the public. Meanwhile, Scott Bessnet’s dual experience—as a former user of the partnership loophole and now as the chief tax enforcer—offers a unique perspective on the challenges of balancing legal tax planning with equitable tax collection.

Whether his background will help streamline the crackdown or fuel further controversy remains to be seen.