IRS audits less than 1% of big partnerships

WASHINGTON — The Internal Revenue Service audits just 0.8% of large partnerships, according to a new government report drawing bipartisan attention from Congress.

That's significant because the number of those partnerships has tripled over the past decade. Large partnerships held $2.3 trillion in total assets and earned $69.1 billion in income in 2011.

The report released Thursday by the Government Accountability Office defined large partnerships as those earning $100 million or more a year and with 100 or more partners. Of those, 81% are in the finance and insurance industries, and they include entities like hedge funds and private equity funds.

By comparison, corporations with $100 million or more in assets were audited 27.1% of the time. Unlike corporations, the tax liability for partnerships lies with its partners, not the entity itself.

"Auditing less than 1% of large partnership tax returns means the IRS is failing to audit the big money," said Sen. Carl Levin, D-Mich, who chairs the Senate Permanent Subcommittee on Investigations. He requested the report with Sen. John McCain, R-Ariz.

"We literally cannot afford to allow these entities to go unaudited," Levin said. "If congressionally imposed red tape or budget cuts are partly responsible for the poor audit numbers, we need to find that out and change it."

Senate Finance Committee chairman Ron Wyden, D-Ore., said the report shows that Congress needs to get back to the basics to fix the tax system.

"This is a real problem and serves as yet another example of why Congress needs to get serious about comprehensive, bipartisan tax reform," Wyden said.

The Internal Revenue Service did not dispute the findings.

"Auditing partnership returns remains a priority area for the IRS given the increased filing activity in this area," said spokesman Jose Manuel Vejarano. "However, budget reductions over the past few years have severely limited our work in this area."

The agency's budget has been cut b! y $900 million since 2010. There are 10,000 fewer employees — 3,100 of which came from enforcement.

In 2010, 2.2% of large partnership returns received field audits, the GAO said.

The IRS looks at far more returns under a "campus function audit," the report said. But unlike field audits, "they generally do not entail a review of the books and records of the taxpayer return in question," said James R. White, the GAO's director of tax issues.

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