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ARTICLE · 25 MAY 2017

IRS Audits Target Management Fee Waivers

Herrick, Feinstein LLP
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IRS audits are increasingly targeting private investment funds over management fee waiver arrangements that are commonly used by investment managers to convert fee income into carried interest.

United StatesTax
Louis Tuchman
Louis Tuchman
Olga Bogush
Olga Bogush
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According to recent Bloomberg BNA reports, IRS audits are increasingly targeting private investment funds over management fee waiver arrangements that are commonly used by investment managers to convert fee income into carried interest.

Bloomberg BNA reports that, in one of the first such cases, the IRS has proposed adjustments and multi-million dollar penalties in connection with management fee waivers and transaction fee offsets tied to a 2012 fund managed by private equity firm Thoma Bravo. Reportedly, Thoma Bravo issued a letter to investors, in which the firm said the terms of the waivers are standard in the industry. This report should serve as a reminder of the IRS's antipathy to this strategy, and might lead fund sponsors to discuss their management fee structures with their tax advisors.

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