Paul L. Caron

Monday, July 23, 2012

How Hedge, Private Equity, and Venture Capital Funds Escape IRS Scrutiny

Tax Analysts Amy S. Elliott (Tax Analysts), Audit Proof? How Hedge Funds, PE Funds, and PTPs Escape the IRS, 136 Tax Notes 351 (July 23, 2012):

True or false: The largest U.S. businesses are under continuous audit by the IRS.

False. Some are effectively immune from audit. Whether a business is audited every year depends in part on its form of organization.

While the tax planning strategies and low effective rates of household-name, publicly traded corporations have made newspaper headlines, those companies are regularly and thoroughly examined by the IRS.

But large, widely held partnerships, including publicly traded partnerships (PTPs) -- which generally have thousands of direct and indirect partners -- seem largely to escape the scrutiny that the Service gives to their C corporation counterparts.

PTPs (such as oil and gas and real estate funds and investment funds like the Blackstone Group LP, the Carlyle Group LP, and KKR & Co. LP) aren't the only lucky ones. While private hedge, private equity, and venture capital funds might not be widely held in terms of the number of direct partners, if one of their investors is a fund of funds, the number of indirect partners balloons.

Through an investigation based on interviews with dozens of practitioners who have direct knowledge of the IRS's large partnership audit practices, including many with government experience, Tax Analysts has learned that this growing class of business entities poses serious problems for tax examiners.

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