IRS eyes equity and hedge managers

The Internal Revenue Service is taking a look at the tax returns of private-equity and hedge fund partners amid concerns that they aren’t accurately accounting for themselves. Specifically, the IRS says it will look into seven areas of interest, which include how the fund managers and investors label income in the form of capital gains versus ordinary income, and whether their accounting accurately reflects that income. Also, the tax man will see whether the firms are using offshore entities to dodge taxes. Other areas of interest include the possibility that the hedge funds and private equity firms aren’t filing properly or that they’re not filing at all, the IRS said in a statement. The House Committee on Ways and Means yesterday voted in favor of a tax package that would raise taxes on fund managers’ carried interest. The bill, known as the Temporary Tax Relief Act of 2007, will prevent managers and partners from having their carried interest taxed at the capital gains rate of 15%. However, they will continue to have a lower rate of taxes on returns from their own investments. The full House will consider the bill next week.