The Wall Street Journal on the potential, or lack thereof, for MLP audits:
Is your investment too complicated to be audited?
It could be, say experts, if it is a partnership stake in a large private-equity firm, hedge fund or master limited partnership. Examples include publicly traded partnerships such as Blackstone Group BX -2.88% and KKR & Co., KKR -2.87% oil and gas MLPs such as Magellan Midstream Partners MMP -1.26% or Kinder Morgan Energy Partners,KMP -0.47% and many privately held large partnerships as well.
The Internal Revenue Service reviewed the books and records of only 0.8% of large partnerships with 100 or more direct investors and $100 million or more in assets in fiscal 2012, according to recent findings from the Government Accountability Office, a federal watchdog agency. By contrast, the IRS audited 27.1% of corporations with $100 million or more in assets in the same year.
“Given their tax treatment, large partnerships are well-positioned to avoid IRS scrutiny,” says Noel Brock, a partnership tax expert who teaches at West Virginia University and is both a certified public accountant and lawyer. That protection usually extends to the investments by individuals in such partnerships as well.
Jim Dubeck, a partnership specialist at the accounting firm Moss Adams in Seattle, says that while he is aware of audits of smaller partnerships, he hasn’t seen one of a large widely held partnership in years. Neither has Don Williamson, a practicing accountant who heads the Kogod Tax Center at American University.
“Investments in large partnerships often dramatically raise tax-prep bills, but I’ve never seen the IRS challenge one,” Mr. Williamson says.