Why it’s so hard to audit hedge funds and private equity

A fascinating little two-minute video from Tax Analysts in the U.S., via this tweet. It’s very clear and simple; it’s less than three minutes long, and it concludes by saying “some businesses are audit-proof.” If you’re busy, the most interesting part of the explanation starts after about 1:10.

As Tax Analysts note:

“In widely held partnerships, there can be thousands of direct partners, many of which might themselves be partnerships. And because ownership in some partnership is traded, just like ownership of stock, someone can be a partner for just a matter of minutes.

There are partnerships that have several hundred thousand ultimate partners. That’s a lot of tax bills to issue. Chances are: the IRS won’t bother with it.

These partnerships essentially shield the partners’ income and deductions from challenge by the IRS. Any partnership item claimed on the partner’s individual return is essentially untouchable.

You are accountable to the I.R.S. for your income. But the owners of some large businesses – some of the wealthiest people in America – aren’t.”

It’s scary stuff.