By Patrick Temple-West
WASHINGTON, April 17 (Reuters) - Fewer than 1 percent of partnerships with more than $100 million in assets, including hedge funds and private equity firms, are audited by the U.S. Internal Revenue Service, a government report said on Thursday.
Despite a surge in the number of partnerships over the last decade, the IRS did not conduct field audits for 99 percent of these tax-favored businesses from 2007 through 2012, said the preliminary report from the Government Accountability Office, the investigative arm of Congress.
In response to the GAO report, the IRS said partnership audits are a priority, but that "budget reductions over the past few years have severely limited our work in this area."
The IRS audited 0.4 percent of all partnership tax returns in 2013, including partnerships with less than $100 million in assets, the agency said in data released in March. The agency audited less than 1 percent of all 190 million tax returns it received last year.
Partnerships, including hedge funds, private equity funds and master limited partnerships, do not pay income taxes but must file annual tax returns showing income, deductions, gains and losses. The partners themselves pay individual income taxes.
The number of large partnerships with 100 or more partners and $100 million or more in assets increased to 2,226 in 2011 from 720 in 2002, the GAO said.
Large corporations, which pay a 35 percent statutory corporate tax rate, are regularly audited by the IRS. The agency's revenue agents often work directly out of a large company's offices.
U.S. senators on Thursday said the IRS is losing tax revenue by not auditing big partnerships.
"It is obvious something is wrong with the IRS audit program for large partnerships," Democratic Senator Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations, said in a statement. Levin has criticized large U.S. companies for aggressively avoiding taxes.
The GAO said its report was preliminary and that its review of IRS partnership audits will continue.
(Editing by Howard Goller and Eric Walsh)