Not too long ago, the Government Accountability Office released a report indicating that some big businesses are getting a pass from the IRS. According to the report, certain big partnerships have been audited at a very low rate.
As a result of this report, there has been increasing concern that some partnerships aren’t being held accountable — and that the government is missing out on some of the revenue it so desperately needs right now.
Which Businesses Aren’t Being Audited?
The GAO’s report indicates that certain large partnerships aren’t being audited. These large partnerships are businesses that earn at least $100 million a year, and might have more than 100 partners. Most of these large partnerships (81 percent) are in industries like finance and insurance, which probably doesn’t come as a surprise to many. Some companies included in this “large partnership” category are private equity funds and hedge funds.
As you might imagine, these business setups are rather complex and difficult to deal with. And that might be the reason that the IRS is reluctant to audit them. Large partnerships are only audited about 0.8 percent of the time. Compare this to corporations with at least $100 million in assets, which are audited about 27.1 percent of the time.
Part of the problem lies with the fact that tax liability in these partnerships actually falls on the partners involved. With a corporation, the corporation itself is taxed and is responsible for its own tax bill. With partnerships, the business itself isn’t liable taxes. Instead, the liability — like the profits/revenues — “pass through” to the partners. When you consider the complex setups of these partnerships, and the sheer number of partners involved, it becomes obvious that auditing such partnerships would be a bit daunting.
However, there is a chance that the audits could uncover revenue that the government might need. The GAO report finds that, in 2011 alone, large partnerships had $2.3 trillion in assets, earning $69.1 billion in income.
Today, those numbers are likely even higher. The fact of the matter is that the formation of these types of partnerships continues to accelerate. In the last 10 years alone, the number of large partnerships formed in the United States has tripled. That’s a pretty big increase. As more companies shift from forming as corporations to forming as large partnerships, the IRS could miss out on revenue due to its reluctance to audit.
What Can Be Done?
There is some concern that actually devoting the time and person power to auditing large partnerships would be expensive. Since these audits would likely take longer to perform than an audit of a corporation, it means it would be more expensive. Would the increase in revenue resulting from these audits be worth the extra costs? Of course, the other consideration is the fact that many large partnerships might be forming because the partners understand that they aren’t likely to be audited. If the IRS steps up enforcement, these partnerships might no longer be as popular. At the very least, they might reform their own tax reporting and paying practices to reduce the chances of an audit. If this is the case, the auditing a few more partnerships each year might be worth it.