If we don't get a handle on crap like this, we will slowly head the way of Greece, where so many citizens have lost faith in the system, tax avoidance is a sport. If everyone else is cheating -- particularly the rich -- then why not me? Having a reasonable and fair revenue collection system depends on public confidence that abuse is rare and is punished when found.

---------

Excerpt 1:

"One reason they rarely face audits is that private equity firms have deployed vast webs of partnerships to collect their profits. Partnerships do not owe income taxes. Instead, they pass those obligations on to their partners, who can number in the thousands at a large private equity firm. That makes the structures notoriously complicated for auditors to untangle.

Increasingly, the agency doesn’t bother. People earning less than $25,000 are at least three times more likely to be audited than partnerships, whose income flows overwhelmingly to the richest 1% of Americans.

The consequences of that imbalance are enormous.

By one recent estimate, the United States loses $75 billion a year from investors in partnerships failing to report their income accurately — at least some of which would probably be recovered if the IRS conducted more audits. That’s enough to roughly double annual federal spending on education."

Excerpt 2:

"The industry makes money in two main ways. Firms typically charge their investors a management fee of 2% of their assets. And they keep 20% of future profits that their investments generate.

That slice of future profits is known as “carried interest.” The term dates at least to the Renaissance. Italian ship captains were compensated in part with an interest in whatever profits were realized on the cargo they carried.

The IRS has long allowed the industry to treat the money it makes from carried interests as capital gains, rather than as ordinary income.

For private equity, it is a lucrative distinction. The federal long-term capital gains tax rate is currently 20%. The top federal income tax rate is 37%.

The loophole is expensive. Victor Fleischer, a University of California, Irvine, law professor, expects it will cost the federal government $130 billion over the next decade.

...... One day in 2011, Gregg Polsky, then a professor of tax law at the University of North Carolina, received an out-of-the-blue email. It was from a lawyer for a former private equity executive. The executive had filed a whistleblower claim with the IRS alleging that their old firm was using illegal tactics to avoid taxes.

The whistleblower wanted Polsky’s advice.

Polsky had previously served as the IRS’s “professor in residence,” and in that role he had developed an expertise in how private equity firms’ vast profits were taxed. Back in academia, he had published a research paper detailing a little-known but pervasive industry tax-dodging technique.

Private equity firms already enjoyed bargain-basement tax rates on their carried interest. Now, Polsky wrote, they had devised a way to get the same low rate applied to their 2% management fees."