The growing number of large partnerships such as private equity and hedge funds is making it difficult for the Internal Revenue Service.
Government Accountability Office investigators found the number of large partnerships defined as those with 100 or more direct and indirect partners and $100 million or more in assets more than tripled from tax years 2002 to 2011, to 10,000 partnerships, while total assets of that universe more than tripled to $7.49 trillion, according to a GAO report released last month.
Compared to a 27% audit rate for large corporations in 2012, the IRS audited just 0.8% of large partnerships. Of those, two-thirds led to no change.
IRS auditors identified for the GAO several impediments to partnership audits, including limited legal authority, complex tiered arrangements and partner numbers that can run into hundreds of thousands.
One of the biggest challenges, the GAO found, was identifying the partnership representative handling IRS matters within the three-year audit deadline, an elusive tactic partnerships use as a first line of defense against an audit, according to the report, Large Partnerships: Growing Population and Complexity Hinder Effective IRS Audits.
Along with an analysis of IRS data on partnerships, GAO investigators talked with IRS auditors and private-sector lawyers.
Collecting tax at the partnership level instead of having to pass audit adjustments through to the individual taxable partners is one possible reform option that the GAO will consider recommending in a report to Congress later this year.