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Few audits of big business partnerships by the IRS

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April 18, 2014

Where does all the cash come from?  The IRS doesn't know

Where does all the cash come from? The IRS doesn’t know

The Internal Revenue Service audits fewer than 1 percent of large business partnerships, according to a government report released Tuesday.

That means some of Wall Street’s largest hedge funds and private equity firms are largely escaping close scrutiny by the IRS, said Sen. Carl Levin, D-Mich.

The Government Accountability Office says the number of large businesses organized as partnerships has more than tripled since 2002, yet hardly any get audited. In 2012, only 0.8 percent were subjected to field exams in which agents do a thorough review of books and records.

The GAO defines large partnerships as those with more than 100 partners and more than $100 million in assets.

“Auditing less than 1% of large partnership tax returns means the IRS is failing to audit the big money,” said Levin, who chairs the Senate subcommittee on investigations.

“It means over 99% 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 said.

More than 80 percent of large partnerships are in the finance and insurance industries, the GAO report said.

The IRS said auditing partnership returns is a priority, but that budget cuts over the past four years have left the agency with the lowest number of enforcement personnel in years.

“Since Fiscal 2010, the IRS budget has been reduced by nearly $900 million,” the service said in a statement. “The IRS has about 10,000 fewer employees than in 2010, affecting our work across our taxpayer service and enforcement categories. Last year, we had 3,100 fewer people in our key enforcement positions than in 2010.”

Overall, the IRS audited fewer than 1 percent of returns by individuals last year, though the chances of getting audited increased with income, according to IRS statistics.

The GAO report says the audit rate for large partnerships has been low since at least 2007.

The IRS releases annual statistics on audits, including the number of partnerships returns that are examined. But the IRS doesn’t usually break down partnership returns by asset size.

Overall, more than 4.4 million partnerships filed tax returns in 2011, and 0.42 percent were audited, according to IRS statistics. That same year, the GAO says there were 2,226 large partnerships, and only 20 were audited. That’s about 0.9 percent.

“This is a real problem and serves as yet another example of why Congress needs to get serious about comprehensive, bipartisan tax reform,” said Sen. Ron Wyden, D-Ore., chairman of the Senate Finance Committee. “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.”

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