The IRS has opened an inquiry into “suspected tax abuses” by hedge fund and private equity managers, in particular, their failure to properly report income or to improperly state ordinary income as capital gains.
The IRS says it is “gathering and analyzing information” for failure to file returns; the timing and allocation of incentive income and other items; methods of accounting used to minimise income; and the way in which investors, traders and dealers report their activities.
The IRS is to investigate the recognition of income on loans, and whether fund managers have prescribed the terms of loans to banks before purchasing loan portfolios.
The IRS’s announcement came as the Ways and Means Committee passed a bill to tax the carried interest in hedge funds and private equity funds as income from compensation and bring to an end the deferral of fees earned from managing offshore funds.