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Large Partnerships Slipping Through IRS Net: GAO

by Mike Godfrey, Tax-News.com, Washington

22 April 2014


The United States Government Accountability Office (GAO) has issued a preliminary report showing that the Internal Revenue Service (IRS) is only auditing about one percent of large partnerships – those with 100 or more partners, and assets exceeding USD100m.

Due to the growth of large partnerships, which include some private equity and hedge funds, GAO was requested, by the Chairman of the US Senate Permanent Subcommittee on Investigations Carl Levin (D – Michigan), John McCain (R – Arizona), and former Chairman of the Senate Finance Committee Max Baucus, who preceded Ron Wyden (D – Oregon), to provide information on their number and characteristics, and on those large partnership returns that have been subject to IRS audit.

"The GAO report shines a needed spotlight on how the IRS is auditing large partnerships, and the news is not good," said Levin. "The GAO report shows that while the number of these massive partnerships with massive assets has exploded, IRS audits have not kept pace."

According to GAO, "between tax years 2002 and 2011, the number of businesses organized as large partnerships increased by more than 200 percent, accounting for USD2.3 trillion in assets and USD69.1bn in total net income by 2011." Yet it was found that IRS field audits reviewed the books and records of only 0.8 percent of these businesses' returns in 2012.

GAO further noted that: "As the size and number of these large partnerships has grown, Congress and others have raised concerns about the extent to which the IRS is able to audit these entities and minimize compliance risk."

"It means over 99 percent of the hedge funds, private equity funds, master limited partnerships, and publicly traded partnerships in this country, some of which earn tens of billions each year, are audit-free," Levin stressed. "It is obvious something is wrong with the IRS audit program for large partnerships."

Wyden added that the GAO report served "as yet another example of why Congress needs to get serious about comprehensive, bipartisan tax reform. This includes looking at the growth of large partnerships and working with the proper parties – including the IRS – to put in place a smart framework for auditing and governance."

TAGS: individuals | compliance | Finance | tax | business | private equity | tax compliance | accounting | hedge funds | audit | Internal Revenue Service (IRS) | tax authority | United States | tax reform | trade | Invest

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