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July 23, 2012
Tax Analysts Investigation: Growing Class of Businesses Largely Escaping IRS Audits
Group Includes Investment Funds, Private Hedge Funds, Private Equity Funds, and Venture Capital Funds

FALLS CHURCH, VA — A growing class of business entities — from investment funds like the Carlyle Group to private hedge, private equity, and venture capital funds — largely escape IRS audits due to their forms of organization, Tax Analysts reports after a lengthy investigation.

In her piece in this week's Tax Notes, the flagship publication of the nonprofit Tax Analysts, correspondent Amy S. Elliott writes: "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," she writes. "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."

The IRS's treatment of PTPs contrasts sharply with its treatment of many large C corporations, more than 800 of which are audited year after year, as IRS agents maintain offices at their corporate headquarters, Elliott reports. Those audits reportedly take up only about 20 percent of the IRS's examination resources but result in about two-thirds of the proposed dollar adjustments.

Because the agency lacks the capacity to audit more than a few large, widely held partnerships each year, Elliott writes, the growth in those partnerships raises serious questions about the IRS's ability to audit large businesses if more of them adopt partnership models.

Read Elliott's article.

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Tax Analysts is an influential provider of tax news and analysis for the global community. Over 150,000 tax professionals in law and accounting firms, corporations, and government agencies rely on Tax Analysts' federal, state, and international content daily. Key products include Tax Notes, Tax Notes Today, State Tax Notes, State Tax Today, Tax Notes International, and Worldwide Tax Daily. Founded in 1970 as a nonprofit organization, Tax Analysts has the industry's largest tax-dedicated correspondent staff, with more than 250 domestic and international correspondents. For more information, visit our home page.