GAO: Few large partnerships facing audits

The Internal Revenue Service is auditing just a fraction of the country’s large partnerships, according to a new study from the Government Accountability Office.

{mosads}The GAO found that the IRS audited 0.8 percent of partnerships with more than 100 partners and $100 million or more in assets in 2012, even after a sharp rise in those kinds of businesses since 2002.

By 2011, more than 2,200 partnerships had more than 100 partners and $100 million or more in assets, up from 720 in 2002. About 10 percent of those large partnerships in 2011 had more than 1,000 partners, and businesses with more than 100 partners had $2.3 trillion in total assets and $69 billion in total income.

Democratic senators, some of whom requested the GAO study, said the findings concerned them.

Sen. Carl Levin (D-Mich.), who has long sought to crack down on tax avoidance, said the study showed that hedge funds and private equity shops “are audit-free.”

“Auditing less than 1% of large partnership tax returns means the IRS is failing to audit the big money,” Levin said in a statement. “It is obvious something is wrong with the IRS audit program for large partnerships. We literally cannot afford to allow these entities to go unaudited.”  

Finance Committee Chairman Ron Wyden (D-Ore.) said the study underscored the need for a broad overhaul of the tax code. Wyden’s predecessor as Finance chairman, former Sen. Max Baucus (D-Mont.), was among the senators to request the study.

“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,” Wyden said. “By rebuilding our tax fundamentals, rather than jumping from one fire drill to the next, Congress can better ensure that we have a fair code and enforcement system in place.”

Top Democrats have already long argued that the tax rate for private equity and hedge fund executives is too low. Democrats have especially complained about the tax break for carried interest, which allows many private equity managers to pay the lower capital gains rate on their profit share. House Ways and Means Committee Chairman Dave Camp (R-Mich.) proposed taking away the carried interest break in his broad tax reform draft this year.

The GAO’s interim study, to be followed later by a final report, said that around 8 percent of large partnerships were subject to some sort of audit in 2012. But the vast majority of those audits were what the GAO termed “an administrative support function used by IRS” that “generally do not entail a review of the books and records of the taxpayer return in question.”

Around 0.8 percent of large partnerships received a so-called field audit in 2012, which would check the books. That’s roughly the same amount as in 2009 and 2011, though 2.2 percent of large partnerships received a field audit in 2010.

More than four in five large partnerships were either finance or insurance shops, the GAO found, with around 7 percent in the real estate business. Around 50 percent of the roughly 3.3 million partnerships in 2011 were in real estate, as opposed to just 9 percent in finance and insurance.

Whether audits caused a change in a large partnerships’ tax bill has also varied widely in recent years. In 2007, 100 percent of field audits caused no change to a large partnership’s return, while 27 percent did in 2010.

In 2013, the last year for which the GAO provided data, 45 percent of field audits caused no change to a return. 

In general, IRS audits are becoming rarer and rarer, as the agency grapples with budget cuts and new responsibilities like implementing the Affordable Care Act.