Congress should consider requiring large partnerships such as private equity and hedge funds to take steps to make it easier for the Internal Revenue Service to audit them and collect taxes due, the Government Accountability Office said in a congressional report delivered Thursday.
The report builds on a preliminary July review of large partnerships, and recommends actions for Congress and the IRS, including having partnerships identify a partner responsible for audits, and to have the partnership, rather than individual partners, pay taxes on audit adjustments.
GAO investigators found that while the number of large partnerships and their total assets more than tripled in tax years 2002 to 2011, the IRS managed to audit less than 1% of large partnerships, which GAO defined as 100 or more direct and indirect partners and $100 million or more in assets.
Almost two-thirds of large partnerships, which in 2012 held $7.5 trillion in assets, had more than 1,000 direct and indirect partners and six or more tiers, “with many being investment funds,” according to the GAO report. The report cited several impediments to IRS audits of partnerships, including complex tiered arrangements and partner numbers that can run into hundreds of thousands.
In 2012, the IRS audited just 0.8% of large partnerships, compared with a 27% audit rate for large corporations. “It doesn't make sense for large corporations to face a nearly 30 times greater chance of an IRS audit than highly profitable large partnerships,” said Sen. Carl Levin, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations. Mr. Levin intends to introduce legislation implementing the GAO recommendations, which include collecting taxes at the partnership level, instead of from individual partners.
The IRS has started several projects to improve large partnership audit procedures, including risk assessment, but GAO officials in the report call for regulatory changes to allow for more streamlined audits.
The report, which was requested by Mr. Levin and ranking subcommittee chairman John McCain, R-Ariz., “raises significant questions about whether the IRS is capable of detecting non-compliance and abusive tax schemes within large partnerships,” the senators said in a statement with Senate Finance Committee Chairman Ron Wyden, D-Ore.
The report is available on the GAO's website.