Eight organizations, including Americans for Financial Reform, are urging the Internal Revenue Service to crack down on a scheme used by Private Equity firms to evade as much as $1 billion in taxes a year. This ploy involves the flagrant mislabeling of taxable dividend payments as untaxed “monitoring fees.” It comes on top of the more widely known “carried interest” loophole, which allows some PE fund billionaires to get away with paying lower tax rates than firefighters, nurses, and secretaries.
In a letter to top officials of the Treasury Department and the IRS, the eight groups note that “The issue of improperly deducted monitoring fees came to public attention in February 2014 when they were reported by The Wall Street Journal, and a variety of commenters have since agreed that the deductions appear to be inappropriate. Unfortunately, monitoring fee practices by private equity firms do not seem to have changed, and it does not appear that the IRS has taken any action.“ The letter argues that these practices are a clear violation of the law. It urges the IRS to change course and “actively, vigorously, and expeditiously enforce current law with respect to ongoing monitoring fee arrangements.”
The letter coincides with the release of a report by the Center for Economic Policy Research, “Fees, Fees and More Fees: How Private Equity Abuses Its Limited Partners and U.S. Taxpayers.” The CEPR report documents some of the ways in which Private Equity General Partners (GPs) amass astronomical fortunes through practices that damage workers, real-economy businesses, communities, and investors as well as taxpayers. In addition to the monitoring fee tax evasion scheme discussed in the letter, the report cites abuses by GPs that include misallocating firm expenses and inappropriately charging them to limited partner investors; failing to share income from portfolio company monitoring fees with their investors; and collecting transaction fees from portfolio companies without registering as broker-dealers as required by law.