Private equity has conquered the American tax system

The $4.5 trillion buyout industry “has perfected sleight-of-hand tax-avoidance strategies so aggressive that at least three private equity officials have alerted the Internal Revenue Service to potentially illegal tactics,” according to a new investigation by The Times. These previously unreported whistle-blower claims involved dozens of private equity firms, Jesse Drucker and Danny Hakim report.

I.R.S. audits of private equity firms are “almost nonexistent,” said Michael Desmond, who stepped down this year as the I.R.S.’s chief counsel. The Times reviewed 10 years of annual reports filed by the five largest publicly traded private equity firms, which contained no sign of the firms ever having to pay the I.R.S. extra money.

“If the I.R.S. started staffing up now, it would take them at least a decade to catch up,” said Monte Jackel, a former I.R.S. attorney. Because buyout firms deploy vast webs of partnerships to collect their profits, untangling these structures’ tax liabilities is notoriously tricky for tax inspectors. “They are so grossly overmatched it’s not funny,” Jackel said.

• The U.S. loses $75 billion a year from investors in partnerships failing to report their income accurately, according to one recent estimate. But people earning less than $25,000 are at least three times more likely to be audited than partnerships.

Lawmakers have tried unsuccessfully to make private equity pay more taxes for years, especially when it comes to the so-called carried interest loophole, in which partners treat the money they receive in performance fees as capital gains rather than income. The whistle-blowers’ claims addressed a technique known as a “fee waiver” that results in lower capital gains tax rates applying to recurring management fees as well as performance fees. The Obama administration barred the most aggressive fee waivers, thereby legitimizing the rest.

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This antitrust push at all levels of government “marks the next phase” in the debate over the future of competition law, Robyn Shapiro, a spokesperson for the progressive nonprofit American Economic Liberties Project, told DealBook. The nonprofit group is launching an “Access to Markets” initiative that connects people with officials to discuss competition concerns. In a new report, A.E.L.P. contends that a few big players abuse their dominance to block competition, resulting in “an insidious form of private regulation.”

• “This isn’t about being anti-business,” said Denise Hearn, a fellow at the nonprofit group and co-lead of the initiative. “We love the ability of markets to produce great outcomes for all. We want a future where markets are fair and democratic, ones that actually allow the best ideas to flourish.”