[Congressional Record Volume 160, Number 155 (Tuesday, December 16, 2014)]
[Senate]
[Pages S6921-S6922]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LEVIN:
  S. 3018. A bill to amend the Internal Revenue Code of 1986 to reform 
the rules relating to partnership audits and adjustments; to the 
Committee on Finance.

  Mr. LEVIN. Mr. President, today, I am introducing the Partnership 
Auditing Fairness Act, a bill designed to improve and streamline the 
audit procedures for large partnerships. This bill would ensure that 
large for-profit partnerships, like other large profitable businesses, 
are subject to routine audits by the Internal Revenue Service, IRS, and 
eliminate audit red tape that currently impedes IRS oversight. This 
legislation mirrors a provision in the Tax Reform Act of 2014, 
introduced earlier this year by Congressman David Camp.
  This legislation would fix a problem that has gained only more 
urgency with time and the explosion in growth of large partnerships, 
including hedge funds, private equity funds, and publicly traded 
partnerships. In a September 2014 report, the Government Accountability 
Office, GAO, determined that the number of large partnerships, defined 
by GAO as those with at least 100 partners and $100 million in assets, 
has tripled since 2002, to over 10,000, while the number of so-called C 
corporations being created, which include our largest public companies,

[[Page S6922]]

fell by 22 percent. According to the GAO report, some of those 
partnerships have revenues totaling billions of dollars per year and 
now collectively hold more than $7.5 trillion in assets, but the IRS is 
auditing only a tiny fraction of them. According to GAO, in 2012, the 
IRS audited less than 1 percent of large partnerships compared to 27 
percent of C corporations. Put another way, a C corporation is 33 times 
more likely to face audit than partnership.
  A recent hearing by the Permanent Subcommittee on Investigations, 
which I chair, demonstrated the critical need to audit large 
partnerships for tax compliance and abusive tax schemes. Our July 2014 
hearing presented a detailed case study of how two financial 
institutions developed a structured financial product known as a basket 
option and sold the product to 13 hedge funds that used the options to 
avoid billions of dollars in Federal taxes. The trading by those hedge 
funds was mostly made up of short term transactions, many of which 
lasted only seconds. However, the hedge funds recast their short-term 
trading profits as long-term option profits, and claimed the profits 
were subject to the long-term capital gains tax rate rather than the 
ordinary income tax rate that would otherwise apply to hedge fund 
investors engaged in daily trading. One hedge fund used its basket 
options to avoid an estimated $6 billion in taxes. Those types of 
abusive tax practices illustrate why large partnerships like hedge 
funds need to be audited by the IRS just as much as large corporations.
  During its review, GAO found that large partnerships are often so 
complex that the IRS can't audit them effectively. GAO reported that 
some partnerships have 100,000 or more partners arranged in multiple 
tiers, and some of those partners may not be people or corporate 
entities but pass-through entities--essentially, partnerships within 
partnerships. Some are publicly traded partnerships, which means their 
partners can change on a daily basis. One IRS official told GAO that 
there were more than 1,000 partnerships with more than a million 
partners in 2012.
  GAO also found obstacles in the law. The Tax Equity and Fiscal 
Responsibility Act, TEFRA, now 3-decades-old, was enacted at a time 
when many partnerships had 30-50 partners; it does not adequately deal 
with current realities. That is why I am introducing legislation to 
repeal some of its provisions and streamline the audit and adjustment 
procedures used for large partnerships so that the IRS can exercise 
effective oversight to detect and deter tax noncompliance or tax abuse 
schemes.
  Three technical aspects of TEFRA create particularly difficult 
obstacles to IRS audits and tax collection efforts for large 
partnerships. The first requires the IRS to identify a ``tax matters 
partner'' to represent the partnership on tax issues, but many 
partnerships do not designate such a partner, and simply identifying 
one in a complex partnership can take months. Second, notifying 
individual partners prior to commencing an audit costs time and money, 
yet produces few if any benefits. Third, TEFRA requires that any tax 
adjustments called for by an audit be passed through to the 
partnership's taxable partners, but the IRS's process for identifying, 
assessing, and collecting from those partners is a manual rather than 
by electronic process, which makes it laborious, time consuming, 
costly, and subject to error. For example, if a partnership with 
100,000 partners under-reported the tax liability of its partners by $1 
million, the IRS would have to manually link each of the partners' 
returns to the partnership return. Then, assuming each partner had an 
equal interest in the partnership, the IRS would have to find, assess, 
and collect $10 from each partner. That collection effort is not 
practical nor is it cost effective. In addition, under TEFRA, any tax 
adjustments have to be applied to past tax years, using complicated and 
expensive filing requirements, instead of to the year in which the 
audit was performed and the adjustment made.
  Fixing the technical flaws in TEFRA is critical to ensuring that the 
audit playing field is level for all taxpayers. An essential element of 
any system of taxation is that it be fair--that is, that all those who 
pay taxes have a reasonable expectation that they are being treated in 
the same fashion as other taxpayers. Without fairness, not only does a 
tax system violate ethical principles, but the system itself fails to 
collect taxes owed, arouses resentment and complaints, and can even 
spark widespread noncompliance. The current situation in which large 
corporations are audited 33 times more than large partnerships is 
neither fair nor sustainable.
  The Partnership Auditing Fairness Act would eliminate the existing 
audit disparity by streamlining the audit process for large 
partnerships. It would simplify audit notification and administrative 
procedures. It would no longer require the IRS to waste audit time 
trying to find a tax matters partner. It would allow the IRS to audit, 
assess, and collect tax from the partnership, rather than passing the 
adjustments through to and collecting from each taxable partner. It 
would apply any tax adjustments to the tax year in which the 
adjustments were finalized, rather than past tax years under audit.
  The enormous discrepancy in audit rates between partnerships and 
other business forms raises a fundamental question of fairness. If one 
type of entity can be nearly free of IRS audits, businesses that do pay 
their taxes and are subject to the audit process rightly feel 
disadvantaged. That lack of fairness is something we simply can't 
tolerate.
  For these reasons, in the next Congress, I urge my colleagues to 
consider supporting this legislation to fix the large partnership audit 
problem.
  Mr. President, I ask unanimous consent that a bill summary be printed 
in the Record.
  There being being no objection, the material was ordered to be 
printed in the Record, as follows:

            Summary of the Partnership Auditing Fairness Act

       The Partnership Auditing Fairness Act would ensure that 
     large for-profit partnerships, like other large profitable 
     businesses, are subject to routine audits by the IRS and 
     eliminate audit red tape that currently impedes IRS 
     oversight. Specifically, it would reform audit procedures 
     imposed by the 1982 Tax Equity and Fiscal Responsibility Act, 
     TEFRA, which are now outdated and contribute to the low audit 
     rate for large partnerships. The bill mirrors the same 
     provision addressing this issue in the larger tax reform bill 
     developed by Congressman David Camp. Key provisions of the 
     bill would:
       Apply streamlined audit rules to all partnerships, but 
     allow partnerships with 100 or fewer partners, other than 
     partners that are pass-through entities, to opt out of the 
     bill's audit procedures and elect instead to be audited under 
     the rules for individual taxpayers.
       Simplify partnership audit participation by having 
     partnerships act through a designated partnership 
     representative.
       Simplify audit notification and administrative procedures 
     by repealing the TEFRA and Electing Large Partnership 
     requirement that the IRS notify all partners prior to 
     initiating an audit.
       Streamline audit adjustments by authorizing the IRS to make 
     adjustments at the partnership level and apply the 
     adjustments to the tax year in which the adjustments are 
     finalized, rather than to the tax years under audit.
       Streamline tax return filing by enabling partnerships to 
     include audit adjustments on their current tax returns for 
     the year in which the adjustments are finalized, instead of 
     having to amend prior-year returns.
       Eliminate the TEFRA problem of having to find and 
     separately collect any tax due from each affected partner by 
     instead collecting the tax at the partnership level.
       Enable partnerships to use administrative procedures to 
     request reconsideration of a proposed under payment of tax by 
     submitting tax returns for individual partners and paying any 
     tax due, while retaining the ability to contest all audit 
     results in court.
                                 ______