Tax-Dodging Strategy Used by ETFs on IRS Watchlist, Agency Says

A tax avoidance strategy used by some exchange traded funds is on the IRS’s radar.In guidance release Monday, Notice 2026-62, the IRS identified investment fund strategies that result in tax benefits that aren’t in line with federal tax rules. The IRS and Treasury Department are considering more guidance on these types of transactions. “The Treasury Department and the IRS intend that any guidance to address the transactions described in this notice will target specific abusive transactions, will minimize compliance burdens, and will respect market expectations with respect to conventional, long-established tax planning that is consistent with the intent of Congress,” the notice said.ETFs are tax-attractive funds because they offer avenues to minimize capital gains. The IRS said its reviewing strategies where an ETF is being used to operate beyond its normal course but instead used to avoid reporting income or gains.The IRS also said it may challenge an abusive investment fund strategy in exams and will take into account different fact-patterns.The agency also released a related revenue ruling on the transactions.